##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the Quarterly Period Ended March 31,
    2004                                           
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File Number: 000-25955

Capital Environmental Resource Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Ontario                                                            |  | Not applicable                          
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

1122 International Blvd., Suite 601,
Burlington, Ontario, Canada L7L 6Z8

(Address of principal executive offices and
zip code)


(905) 319-1237

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934).
days.     Yes o          No þ

The number of shares of Common Stock, no par
value, of the registrant outstanding at May 1, 2004 was
95,373,778.



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TABLE OF CONTENTS

|                                              |  |                                                                                                                      |    |      |    | 
|--------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                              |  |                                                                                                                      |    | Page
|                                              |  |                                                                                                                      |    |     
|PART I. FINANCIAL
    INFORMATION            
|Item 1.                                       |  | Financial Statements                                                                                                 |    |      | 2  | 
|                                              |  | Condensed Consolidated
    Balance Sheets as of March 31, 2004 (unaudited) and
    December 31, 2003                 |    |      | 2  | 
|                                              |  | Unaudited Condensed
    Consolidated Statements of Operations for the three months ended
    March 31, 2004 and 2003 |    |      | 3  | 
|                                              |  | Unaudited Condensed
    Consolidated Statement of Shareholders Equity for the
    three months ended March 31, 2004 |    |      | 4  | 
|                                              |  | Unaudited Condensed
    Consolidated Statements of Cash Flows for the three months ended
    March 31, 2004 and 2003 |    |      | 5  | 
|                                              |  | Notes to Unaudited Condensed
    Consolidated Financial Statements                                                   |    |      | 6  | 
|Item 2.                                       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |    |      | 21 | 
|Item 3.                                       |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                       |    |      | 35 | 
|Item 4.                                       |  | Controls and Procedures                                                                                              |    |      | 36 | 
|                                             
|PART II. OTHER
    INFORMATION               
|Item 1.                                       |  | Legal Proceedings                                                                                                    |    |      | 36 | 
|Item 2.                                       |  | Changes in Securities, Use
    of Proceeds and Issuer Purchases of Equity Securities                                 |    |      | 36 | 
|Item 3.                                       |  | Defaults Upon Senior
    Securities                                                                                  |    |      | 37 | 
|Item 4.                                       |  | Submission of Matters to a
    Vote of Security Holders                                                              |    |      | 37 | 
|Item 5.                                       |  | Other Information                                                                                                    |    |      | 37 | 
|Item 6.                                       |  | Exhibits and Reports on
    Form 8-K                                                                                 |    |      | 37 | 
|Signatures                                    |  |                                                                                                                      | 38 |     
|Employment Agreement w/Ivan R. Cairns        
|Employment Agreement w/Mark Pytosh           
|Letter Dated May 12, 2004                    
|Sec 302 Chief Executive Officer Certification
|Sec 302 Chief Financial Officer Certification
|Sec 906 Chief Executive Officer Certification
|Sec 906 Chief Financial Officer Certification



1



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##### Table of Contents






PART I. FINANCIAL INFORMATION





|        |                     
|------- | --------------------
|Item 1. | Financial Statements




CAPITAL ENVIRONMENTAL RESOURCE INC.

CONDENSED CONSOLIDATED BALANCE
SHEETS

(In thousands of U.S. dollars, except
share amounts)


|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |              |         |  |         |         |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------- | ------------ | ------- |  | ------- | ------- | ------- | 
|                                                                                                                                                                 |                                                                                                                                                                   | March 31,                                      |         | December 31,
|                                                                                                                                                                 |                                                                                                                                                                   | 2004                                           |         | 2003        
|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |             
|                                                                                                                                                                 |                                                                                                                                                                   | (Unaudited)                                    |         |             
|ASSETS                                                                                                                                                          
|Current assets:                                                                                                                                                  |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|                                                                                                                                                                 | Cash and cash equivalents                                                                                                                                         |                                                | $       | 5,817        |         |  | $       | 21,062  |        
|                                                                                                                                                                 | Restricted cash                                                                                                                                                   |                                                |         | 999          |         |  |         | 14,433  |        
|                                                                                                                                                                 | Accounts receivable (net of allowance for
    doubtful accounts of $769 and $620 as of March 31, 2004 and
    December 31, 2003, respectively)                    |                                                |         | 26,387       |         |  |         | 26,999  |        
|                                                                                                                                                                 | Prepaid expenses and other current assets                                                                                                                         |                                                |         | 29,553       |         |  |         | 29,649  |        
|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|                                                                                                                                                                 |                                                                                                                                                                   | Total current assets                           |         |              | 62,756  |  |         |         | 92,143  | 
|Property and equipment, net                                                                                                                                      |                                                                                                                                                                   |                                                | 81,070  |              |         |  | 74,521  |        
|Landfill sites, net                                                                                                                                              |                                                                                                                                                                   |                                                | 152,076 |              |         |  | 117,541 |        
|Deferred income taxes, net                                                                                                                                       |                                                                                                                                                                   |                                                | 2,507   |              |         |  | 1,135   |        
|Goodwill and other intangible assets,
    net                                                                                                                    |                                                                                                                                                                   |                                                | 184,220 |              |         |  | 163,380 |        
|Other assets                                                                                                                                                     |                                                                                                                                                                   |                                                | 24,063  |              |         |  | 22,278  |        
|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|                                                                                                                                                                 |                                                                                                                                                                   | Total assets                                   |         | $            | 506,692 |  |         | $       | 470,998 | 
|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                                                        
|Current liabilities:                                                                                                                                             |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|                                                                                                                                                                 | Accounts payable                                                                                                                                                  |                                                | $       | 13,309       |         |  | $       | 12,074  |        
|                                                                                                                                                                 | Accrued expenses and other current liabilities                                                                                                                    |                                                |         | 26,145       |         |  |         | 25,401  |        
|                                                                                                                                                                 | Short-term financing and current portion of
    long-term debt                                                                                                    |                                                |         | 6,158        |         |  |         | 172,280 |        
|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|                                                                                                                                                                 |                                                                                                                                                                   | Total current liabilities                      |         |              | 45,612  |  |         |         | 209,755 | 
|Long-term debt                                                                                                                                                   |                                                                                                                                                                   |                                                | 186,215 |              |         |  | 3,130   |        
|Accrued closure, post-closure and other
    obligations                                                                                                          |                                                                                                                                                                   |                                                | 6,075   |              |         |  | 8,791   |        
|Cumulative mandatorily redeemable Preferred
    Shares (net of discount of $12,357 and $13,558 as of
    March 31, 2004 and December 31, 2003,
    respectively) |                                                                                                                                                                   |                                                | 52,039  |              |         |  | 48,205  |        
|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|                                                                                                                                                                 |                                                                                                                                                                   | Total liabilities                              |         |              | 289,941 |  |         |         | 269,881 | 
|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|Commitments and contingencies                                                                                                                                    |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|Shareholders equity:                                                                                                                                            |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|                                                                                                                                                                 | Common stock, no par value; unlimited shares
    authorized; 73,707,902 and 68,338,828 shares issued as of
    March 31, 2004 and December 31, 2003, respectively |                                                |         | 245,133      |         |  |         | 215,395 |        
|                                                                                                                                                                 | Options, warrants and deferred stock-based
    compensation                                                                                                       |                                                |         | 24,624       |         |  |         | 25,828  |        
|                                                                                                                                                                 | Accumulated other comprehensive income                                                                                                                            |                                                |         | 13,786       |         |  |         | 15,952  |        
|                                                                                                                                                                 | Accumulated deficit                                                                                                                                               |                                                |         | (66,792      | )       |  |         | (56,058 | )      
|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|                                                                                                                                                                 |                                                                                                                                                                   | Total shareholders equity                     |         |              | 216,751 |  |         |         | 201,117 | 
|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |              |         |  |         |        
|                                                                                                                                                                 |                                                                                                                                                                   | Total liabilities and shareholders
    equity |         | $            | 506,692 |  |         | $       | 470,998 | 
|                                                                                                                                                                 |                                                                                                                                                                   |                                                |         |              |         |  |         |        

The accompanying notes are an integral part of
these condensed consolidated financial statements.

2



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##### Table of Contents






CAPITAL ENVIRONMENTAL RESOURCE INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands of U.S. dollars and share
amounts, except per share data)


|                                                                                                                                                                                     |                                                                                                 |                    |         |        |   |   |        |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------- | ------------------ | ------- | ------ | - | - | ------ | ------ | -
|                                                                                                                                                                                     |                                                                                                 |                   
|                                                                                                                                                                                     |                                                                                                 | Three Months Ended
|                                                                                                                                                                                     |                                                                                                 | March 31,         
|                                                                                                                                                                                     |                                                                                                 |                   
|                                                                                                                                                                                     |                                                                                                 | 2004               |         | 2003  
|                                                                                                                                                                                     |                                                                                                 |                    |         |       
|Revenue                                                                                                                                                                              |                                                                                                 | $                  | 50,317  |        |   | $ | 25,280 |       
|Operating and other expenses:                                                                                                                                                        |                                                                                                 |                    |         |        |   |   |        |       
|                                                                                                                                                                                     | Cost of operations                                                                              |                    |         | 34,171 |   |   |        | 16,594 |  
|                                                                                                                                                                                     | Selling, general and administrative expense                                                     |                    |         | 10,559 |   |   |        | 4,432  |  
|                                                                                                                                                                                     | Depreciation, depletion and amortization                                                        |                    |         | 5,472  |   |   |        | 3,225  |  
|                                                                                                                                                                                     | Foreign exchange gain and other                                                                 |                    |         | (90    | ) |   |        | (35    | )
|                                                                                                                                                                                     |                                                                                                 |                    |         |        |   |   |        |       
|Income from operations                                                                                                                                                               |                                                                                                 |                    | 205     |        |   |   | 1,064  |       
|Interest expense                                                                                                                                                                     |                                                                                                 |                    | 6,316   |        |   |   | 1,320  |       
|Cumulative mandatorily redeemable preferred stock
    dividends and amortization of issue costs                                                                                      |                                                                                                 |                    | 4,019   |        |   |   |       |       
|                                                                                                                                                                                     |                                                                                                 |                    |         |        |   |   |        |       
|Loss before income taxes                                                                                                                                                             |                                                                                                 |                    | (10,130 | )      |   |   | (256   | )     
|Income tax provision                                                                                                                                                                 |                                                                                                 |                    | 829     |        |   |   | 43     |       
|                                                                                                                                                                                     |                                                                                                 |                    |         |        |   |   |        |       
|Loss before cumulative effect of change in
    accounting principle                                                                                                                  |                                                                                                 |                    | (10,959 | )      |   |   | (299   | )     
|Cumulative effect of change in accounting
    principle, net of provision for income taxes of $132 and $256
    for the three months ended March 31, 2004 and 2003,
    respectively |                                                                                                 |                    | 225     |        |   |   | 518    |       
|                                                                                                                                                                                     |                                                                                                 |                    |         |        |   |   |        |       
|Net income (loss)                                                                                                                                                                    |                                                                                                 |                    | (10,734 | )      |   |   | 219    |       
|Deemed dividend on Series 1 Preferred Shares                                                                                                                                         |                                                                                                 |                    |        |        |   |   | (8,532 | )     
|                                                                                                                                                                                     |                                                                                                 |                    |         |        |   |   |        |       
|Net loss attributable to Common
    Shareholders                                                                                                                                     |                                                                                                 | $                  | (10,734 | )      |   | $ | (8,313 | )     
|                                                                                                                                                                                     |                                                                                                 |                    |         |        |   |   |        |       
|Basic and diluted loss per share:                                                                                                                                                    |                                                                                                 |                    |         |        |   |   |        |       
|                                                                                                                                                                                     | Basic and diluted loss per share before
    cumulative effect of change in accounting principle |                    | $       | (0.15  | ) |   | $      | (0.25  | )
|                                                                                                                                                                                     | Cumulative effect of change in accounting
    principle                                         |                    |         |       |   |   |        | 0.01   |  
|                                                                                                                                                                                     |                                                                                                 |                    |         |        |   |   |        |       
|                                                                                                                                                                                     | Loss per share  basic and diluted                                                              |                    | $       | (0.15  | ) |   | $      | (0.24  | )
|                                                                                                                                                                                     |                                                                                                 |                    |         |        |   |   |        |       
|                                                                                                                                                                                     | Weighted average Common Shares
    outstanding  basic and diluted                              |                    |         | 70,583 |   |   |        | 35,195 |  
|                                                                                                                                                                                     |                                                                                                 |                    |         |        |   |   |        |       

The accompanying notes are an integral part of
these condensed consolidated financial statements.

3



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##### Table of Contents






CAPITAL ENVIRONMENTAL RESOURCE INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
SHAREHOLDERS EQUITY

FOR THE THREE MONTHS ENDED MARCH 31,
2004


(In thousands of U.S. dollars and share
amounts)


|                                                                     |  |              |        |              |  |               |         |             |  |               |        |        |  |   |        |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ------------ | ------ | ------------ |  | ------------- | ------- | ----------- |  | ------------- | ------ | ------ |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                     |  |              |        |              |  | Options,      |         | Accumulated |  |               |        |       
|                                                                     |  |              |        | Warrants and |  | Other         |         |             |  |              
|                                                                     |  | Common Stock |        | Deferred     |  | Comprehensive |         |             |  | Total        
|                                                                     |  |              |        | Stock-Based  |  | Income        |         | Accumulated |  | Shareholders
|                                                                     |  | Shares       |        | Amount       |  | Compensation  |         | (Loss)      |  | Deficit       |        | Equity
|                                                                     |  |              |        |              |  |               |         |             |  |               |        |       
|Balance, December 31, 2003                                           |  |              | 68,339 |              |  | $             | 215,395 |             |  | $             | 25,828 |        |  | $ | 15,952 |   |  | $ | (56,058 | ) |  | $ | 201,117 |  
|Common Shares issued in acquisitions                                 |  |              | 5,298  |              |  |               | 30,337  |             |  |               |       |        |  |   |       |   |  |   |        |   |  |   | 30,337  |  
|Common Shares to be issued related to an
    acquisition (38 shares) |  |              |       |              |  |               |        |             |  |               | 241    |        |  |   |       |   |  |   |        |   |  |   | 241     |  
|Exercise of options and warrants                                     |  |              | 71     |              |  |               | 295     |             |  |               | (54    | )      |  |   |       |   |  |   |        |   |  |   | 241     |  
|Deferred stock-based compensation                                    |  |              |       |              |  |               |        |             |  |               | (1,391 | )      |  |   |       |   |  |   |        |   |  |   | (1,391  | )
|Valuation adjustment for shares issued in an
    acquisition         |  |              |       |              |  |               | (894    | )           |  |               |       |        |  |   |       |   |  |   |        |   |  |   | (894    | )
|Foreign currency translation adjustment                              |  |              |       |              |  |               |        |             |  |               |       |        |  |   | (2,166 | ) |  |   |        |   |  |   | (2,166  | )
|Net loss                                                             |  |              |       |              |  |               |        |             |  |               |       |        |  |   |       |   |  |   | (10,734 | ) |  |   | (10,734 | )
|                                                                     |  |              |        |              |  |               |         |             |  |               |        |        |  |   |        |   |  |   |         |   |  |   |         |  
|Balance, March 31, 2004                                              |  |              | 73,708 |              |  | $             | 245,133 |             |  | $             | 24,624 |        |  | $ | 13,786 |   |  | $ | (66,792 | ) |  | $ | 216,751 |  
|                                                                     |  |              |        |              |  |               |         |             |  |               |        |        |  |   |        |   |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of
these condensed consolidated financial statements.

4



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##### Table of Contents






CAPITAL ENVIRONMENTAL RESOURCE INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS

(In thousands of U.S. dollars)


|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |         |   |       |        |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------- | - | ------ | ------- | ------- | - | ----- | ------ | -
|                                                                 |                                                                                                 |                                                                                          
|                                                                 |                                                                                                 | Three Months Ended                                                                       
|                                                                 |                                                                                                 | March 31,                                                                                
|                                                                 |                                                                                                 |                                                                                          
|                                                                 |                                                                                                 | 2004                                                                                      |                                                                     | 2003                                          
|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                               
|Cash flows from operating
    activities:                        |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|                                                                 | Net income (loss)                                                                               |                                                                                           | $                                                                   | (10,734                                        | ) |        | $       | 219     |  
|                                                                 | Adjustments to reconcile net income (loss) to net
    cash flows from operating activities     |                                                                                           |                                                                     |                                                |   |        |         |         |  
|                                                                 |                                                                                                 |                                                                                           | Depreciation and depletion                                          |                                                |   | 4,648  |         |         |   | 3,067 |       
|                                                                 |                                                                                                 |                                                                                           | Amortization of intangible assets                                   |                                                |   | 824    |         |         |   | 158   |       
|                                                                 |                                                                                                 |                                                                                           | Dividends and accretion on redeemable Preferred
    Shares          |                                                |   | 4,019  |         |         |   |      |       
|                                                                 |                                                                                                 |                                                                                           | Amortization of debt issue costs                                    |                                                |   | 2,210  |         |         |   | 220   |       
|                                                                 |                                                                                                 |                                                                                           | Income tax provision                                                |                                                |   | 829    |         |         |   | 43    |       
|                                                                 |                                                                                                 |                                                                                           | Foreign exchange gain and other                                     |                                                |   | (90    | )       |         |   | (35   | )     
|                                                                 |                                                                                                 |                                                                                           | Non-cash stock-based compensation                                   |                                                |   | (1,391 | )       |         |   | (298  | )     
|                                                                 |                                                                                                 |                                                                                           | Cumulative effect of change in accounting
    principle, net of tax |                                                |   | (225   | )       |         |   | (518  | )     
|                                                                 |                                                                                                 |                                                                                           | Other non-cash items                                                |                                                |   | 36     |         |         |   | 67    |       
|                                                                 |                                                                                                 | Changes in operating assets and liabilities
    (excluding the effects of acquisitions)  |                                                                     |                                                |   |        |         |         |   |      
|                                                                 |                                                                                                 |                                                                                           |                                                                     | Accounts receivable                            |   |        | 1,918   |         |   |       | 114    |  
|                                                                 |                                                                                                 |                                                                                           |                                                                     | Prepaid expenses and other current assets      |   |        | (5,779  | )       |   |       | (712   | )
|                                                                 |                                                                                                 |                                                                                           |                                                                     | Accounts payable                               |   |        | 2,449   |         |   |       | 4,791  |  
|                                                                 |                                                                                                 |                                                                                           |                                                                     | Accrued expenses and other current liabilities |   |        | 1,122   |         |   |       | (3,331 | )
|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|                                                                 |                                                                                                 |                                                                                           | (164                                                                | )                                              |   |        | 3,785   |        
|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|Cash flows from investing
    activities:                        |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|                                                                 | Cash used in business combinations and
    significant asset acquisitions, net of cash acquired |                                                                                           |                                                                     | (28,858                                        | ) |        |         | (1,497  | )
|                                                                 | Capital expenditures                                                                            |                                                                                           |                                                                     | (9,207                                         | ) |        |         | (2,768  | )
|                                                                 | Deposits for business acquisitions and other                                                    |                                                                                           |                                                                     | (2,445                                         | ) |        |         | (14,167 | )
|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|                                                                 |                                                                                                 |                                                                                           | (40,510                                                             | )                                              |   |        | (18,432 | )      
|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|Cash flows from financing
    activities:                        |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|                                                                 | Proceeds from issuance of debt                                                                  |                                                                                           |                                                                     | 12,000                                         |   |        |         | 8,801   |  
|                                                                 | Principal repayments of debt                                                                    |                                                                                           |                                                                     | (37                                            | ) |        |         |        |  
|                                                                 | Repayment of capital lease obligations                                                          |                                                                                           |                                                                     | (382                                           | ) |        |         | (308    | )
|                                                                 | Proceeds from restricted cash                                                                   |                                                                                           |                                                                     | 13,434                                         |   |        |         |        |  
|                                                                 | Proceeds from letters of credit                                                                 |                                                                                           |                                                                     | 976                                            |   |        |         |        |  
|                                                                 | Proceeds from the issuance of Series 1
    Preferred Shares                                     |                                                                                           |                                                                     |                                               |   |        |         | 22,000  |  
|                                                                 | Proceeds from the exercise of options and warrants                                              |                                                                                           |                                                                     | 241                                            |   |        |         |        |  
|                                                                 | Fees paid for financing transactions                                                            |                                                                                           |                                                                     | (665                                           | ) |        |         | (1,329  | )
|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|                                                                 |                                                                                                 |                                                                                           | 25,567                                                              |                                                |   |        | 29,164  |        
|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|Effect of exchange rate changes on cash and
    cash equivalents |                                                                                                 |                                                                                           | (138                                                                | )                                              |   |        | 133     |        
|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|Increase (decrease) in cash and cash
    equivalents             |                                                                                                 |                                                                                           | (15,245                                                             | )                                              |   |        | 14,650  |        
|Cash and cash equivalents, beginning of
    period               |                                                                                                 |                                                                                           | 21,062                                                              |                                                |   |        | 1,775   |        
|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        
|Cash and cash equivalents, end of
    period                     |                                                                                                 | $                                                                                         | 5,817                                                               |                                                |   | $      | 16,425  |        
|                                                                 |                                                                                                 |                                                                                           |                                                                     |                                                |   |        |         |        

The accompanying notes are an integral part of
these condensed consolidated financial statements.

5



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##### Table of Contents






CAPITAL ENVIRONMENTAL RESOURCE INC.

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL STATEMENTS


(In thousands of U.S. dollars, unless
otherwise stated)




|   |                                                       
|-- | ------------------------------------------------------
|1. | Organization of Business and Basis of
    Presentation

Capital Environmental Resource Inc.
(Capital, we, us or
our) is a multi-regional, integrated solid waste
services company, providing collection, transfer, landfill
disposal and recycling services for commercial, industrial and
residential customers in the United States and Canada. As part
of our business strategy to expand into the U.S., we intend to
enter into a migration transaction (the Migration
Transaction). Under the Migration Transaction, our
corporate structure will be reorganized so that Waste Services,
Inc. (Waste Services), currently a subsidiary of
Capital Environmental Resource Inc., will become the parent
company of our corporate group.

The accompanying unaudited condensed consolidated
financial statements include Capitals accounts and the
accounts of our wholly owned subsidiaries. These condensed
consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange
Commission. All significant intercompany transactions and
accounts have been eliminated. All figures are presented in
thousands of U.S. dollars, except share and per share data,
or except where expressly stated as being in Canadian dollars
(C$) or in millions. Certain information related to
Capitals organization, significant accounting policies and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States has been condensed or omitted.
Except as disclosed in Note 2, the accounting policies
followed in the preparation of these interim condensed
consolidated financial statements are consistent with those
followed in our annual consolidated financial statements for the
year ended December 31, 2003, as filed on Form 20-F.
In the opinion of management, these unaudited condensed
consolidated financial statements contain all material
adjustments, consisting only of normal recurring adjustments,
necessary to fairly state Capitals financial position,
results of operations and cash flows for the periods presented
and the presentations and disclosures herein are adequate when
read in conjunction with our Form 20-F for the year ended
December 31, 2003. Income taxes during these interim
periods have been provided for based upon our anticipated annual
effective income tax rate. Certain reclassifications have been
made to the prior period financial statement amounts to conform
to the current presentation. Due to the seasonal nature of our
business, operating results for interim periods are not
necessarily indicative of the results for full years. These
interim financial statements should be read in conjunction with
our audited consolidated financial statements and notes thereto
appearing in our annual report on Form 20-F for the year
ended December 31, 2003.

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates
include the allowance for doubtful accounts, depletion of
landfill development costs, liabilities for capping, closure and
post-closure obligations, liabilities for potential litigation
and deferred taxes.

A significant portion of our operations are
currently domiciled in Canada; as such, for each reporting
period, we translate the results of operations and financial
condition of our Canadian operations into U.S. dollars.
Therefore, reported results of operations and financial
condition are subject to changes in the exchange relationship
between the two currencies. For example, as the relationship of
the Canadian dollar strengthens against the U.S. dollar,
revenue is favorably affected and conversely expenses are
unfavorably affected. Assets and liabilities of Canadian
operations have been translated from Canadian dollars into
U.S. dollars at the exchange rates in effect at the
relevant balance sheet dates, and revenue and expenses of
Canadian operations have been translated from Canadian dollars
into U.S. dollars at the average exchange rates prevailing
during the period. Unrealized gains and losses on translation of
the Canadian operations into

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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


U.S. dollars are reported as a separate
component of shareholders equity and are included in
comprehensive income (loss). Separately, monetary assets and
liabilities denominated in U.S. dollars held by the
Canadian operations are re-measured from U.S. dollars into
Canadian dollars and then translated into U.S. dollars. The
effects of re-measurement are reported currently as a component
of net income (loss). Currently, we do not hedge our exposure to
changes in foreign exchange rates.

Basic earnings (loss) per share is calculated by
dividing income (loss) available to Common Shareholders by the
weighted average number of Common Shares outstanding for the
period. Diluted earnings (loss) per share is calculated based on
the weighted average shares of Common Stock outstanding during
the period plus the dilutive effect of Common Stock purchase
warrants and stock options using the treasury stock method and
the dilutive effects of convertible instruments using the
if-converted method. Contingently issuable shares are included
in the computation of basic earnings (loss) per share when
issuance of the shares is no longer contingent. Due to the net
losses attributable to Common Shareholders for the three months
ended March 31, 2004 and 2003, basic and diluted loss per
share were the same, as the effect of potentially dilutive
securities would have been anti-dilutive. Dilutive securities
not included in the diluted loss per share calculation are as
follows:

|                                   |  |             |       |              |  |  |        | 
|---------------------------------- |  | ----------- | ----- | ------------ |  |  | ------ | 
|                                   |  | March 31,   |       | December 31,
|                                   |  | 2004        |       | 2003        
|                                   |  |             |       |             
|                                   |  | (Unaudited) |       |             
|Series 1 Preferred Shares          |  |             |      |              |  |  | 13,582 | 
|Options to purchase Common Shares  |  |             | 1,794 |              |  |  | 707    | 
|Warrants to purchase Common Shares |  |             | 6,635 |              |  |  | 3,189  | 
|                                   |  |             |       |              |  |  |        | 
|Dilutive securities                |  |             | 8,429 |              |  |  | 17,478 | 
|                                   |  |             |       |              |  |  |        | 



|   |                               
|-- | ------------------------------
|2. | Change in Accounting Principle

On January 1, 2003, we adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 143 Accounting for Asset
Retirement Obligations. SFAS No. 143 required us
to change our methodology used to record liabilities related to
capping, closure and post-closure of our landfill operations.
Under SFAS No. 143, we are required to recognize as an
asset, the fair value of the liability for an asset retirement
obligation. The asset is then depleted, consistently with other
capitalized landfill costs, over the remaining useful life of
the site based upon units of consumption as airspace in the
landfill is consumed. Upon adoption, the liability we recognized
represented the present value of the total estimated future
asset retirement obligation. The methodology we used to define
the cost pool related to an obligating event included total
capping, closure and post-closure costs to be incurred, on a
discounted basis, over the remaining life of the site.

In connection with the opening of our JED
landfill in Florida in the first quarter of 2004, we
re-evaluated and changed the methodology used to define an
obligating event, and we segregated the cost pool for the
obligation into closure and post-closure obligations and
landfill capping obligations. Effective January 1, 2004, we
recognize the fair value of the liability for the closure and
post-closure obligation over the life of the landfill as waste
is placed in the site as opposed to the time at which the
landfill commences operations. Additionally, under our new
method, we view landfill capping events, which occur in phases
throughout the life of a landfill, as discrete activities that
are recognized as asset retirement obligations separately from
other closure and post-closure obligations. These capping events
occur generally during the operating life of a landfill and can
be associated with specific waste placed under an area to be
capped. As a result, we use a separate capping rate per ton to
recognize the principal amount of the retirement obligation and
related asset associated with each

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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


capping event. We deplete the asset recorded
pursuant to this approach as waste volume covered by the capping
event is placed into the landfill.

We believe this method is preferable as it
(i) provides a better measure of the fair value of the
asset retirement obligation by more precisely matching the
landfill obligating events with the recognition of the fair
value of the asset retirement obligation; (ii) is more
consistent with our policies for the allocation of purchase
price in landfill acquisitions and the related valuation of
assumed retirement obligations; (iii) reflects a more
accurate rate of accretion thereby creating a more accurate
value of our current and future retirement obligations and
(iv) is the predominant method used in our industry.

The effect of the change in methodology was to
increase net loss before cumulative effect of change in
accounting principle for the three months ended March 31,
2004 and 2003 approximately $0.1 million. The effect on
basic or diluted earnings per share for the three months ended
March 31, 2004 and 2003 was de minimus.

The following table summarizes the balance sheet
impact of adopting the accounting change on January 1, 2004:

|                                             |  |                   |         |                |  |                 |        |   |  |   |         |  
|-------------------------------------------- |  | ----------------- | ------- | -------------- |  | --------------- | ------ | - |  | - | ------- | -
|                                             |  |                   |         | Adjustment for |  |                
|                                             |  | Balance,          |         | Change in      |  | Balance,       
|                                             |  | December 31, 2003 |         | Accounting     |  | January 1, 2004
|                                             |  |                   |         |                |  |                
|Landfill sites                               |  | $                 | 128,044 |                |  | $               | (3,191 | ) |  | $ | 124,853 |  
|Accumulated depletion                        |  |                   | (10,503 | )              |  |                 | 717    |   |  |   | (9,786  | )
|                                             |  |                   |         |                |  |                 |        |   |  |   |         |  
|Landfill sites, net                          |  | $                 | 117,541 |                |  | $               | (2,474 | ) |  | $ | 115,067 |  
|                                             |  |                   |         |                |  |                 |        |   |  |   |         |  
|Accrued closure and post-closure obligations |  | $                 | 7,737   |                |  | $               | (2,831 | ) |  | $ | 4,906   |  
|                                             |  |                   |         |                |  |                 |        |   |  |   |         |  
|Deferred income tax asset (liability)        |  | $                 | 3,727   |                |  | $               | (132   | ) |  | $ | 3,595   |  
|                                             |  |                   |         |                |  |                 |        |   |  |   |         |  



|   |                                                             
|-- | ------------------------------------------------------------
|3. | Business Combinations and Significant Asset
    Acquisitions

In November 2003, we entered into an agreement to
acquire the assets of Allied Waste Industries, Inc.s
(Allied) northern and central Florida operations
(the Allied Assets) for a purchase price of
approximately $120.0 million subject to an adjustment for
working capital. The primary metropolitan areas currently served
by the Allied Assets are Tampa, Sarasota and Jacksonville,
Florida. On December 31, 2003, we completed the first phase
of the Allied Assets acquisition, which included the assets for
which all required transfer consents and approvals had been
obtained. The cash purchase price for the first phase of the
acquisition was approximately $81.1 million. During the
first quarter of 2004, we acquired additional Allied Assets for
cash consideration totaling approximately $14.3 million. We
expect to complete the acquisition of the remaining Allied
Assets in the second quarter of 2004.

In April 2004, we completed an exchange of the
Nassau Landfill and related assets with a book value of
approximately $2.2 million, which were acquired from Allied
in December 2003, for a collection operation in the metropolitan
Orlando area and cash proceeds of $10.0 million, subject to
working capital adjustments. As part of this exchange, the new
owner of the Nassau Landfill assumed responsibility for the
closure and post closure obligations related to the landfill.
Proceeds in excess of net assets exchanged will reduce goodwill
from the original Allied Assets acquisition.

In February 2004, we acquired a permitted
municipal solid waste landfill currently under development in
Fort Bend County, Texas (the Fort Bend Regional
Landfill). The purchase price was comprised of
$5.1 million in cash, a seller financed promissory note of
$5.0 million and the issuance of 4,375,000 Common Shares
valued at approximately $25.0 million. The landfill site,
which will serve the metropolitan Houston

8



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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


area, is approximately 2,600 acres and has
an initial permitted capacity of 47.6 million cubic yards.
In addition to the landfill, we acquired a leasehold interest in
a fully permitted transfer station site near Houston. In
connection with the acquisition of the Fort Bend Regional
Landfill, we entered into a royalty agreement, under which we
will be required to pay a royalty of $0.25 per ton of
eligible waste, as defined in the agreement, after we commence
operations at the site and for the first five years subsequent
to the date of the royalty agreement and $0.35 per ton of
eligible waste thereafter. Separately, in January 2004, we
acquired an industrial-permitted waste landfill site in
Saskatchewan. The purchase price was comprised of
$1.1 million in cash and the issuance of 12,000 Common
Shares valued at approximately $0.1 million.

During the first quarter of 2004, we also
acquired the assets of three collection businesses in the
metropolitan Phoenix area for aggregate cash consideration of
approximately $8.4 million plus the current and future
issuance of 949,800 Common Shares valued at approximately
$5.5 million. One of these acquisitions contains an
earn-out provision that may require us to issue up to 40,000
Common Shares and pay additional cash purchase price to the
sellers. Under the terms of the agreement, this provision will
be settled in the second quarter of 2004, at which time, the
purchase price will be adjusted accordingly.

The following unaudited condensed consolidated
pro forma statement of operations data shows the results of
Capitals operations for the three months ended
March 31, 2003 as if recently completed business
combinations had occurred at the beginning of 2003 (in thousands
except per share amount):

|                                                                                     |  |                |        |  
|------------------------------------------------------------------------------------ |  | -------------- | ------ | -
|                                                                                     |  | Three         
|                                                                                     |  | Months Ended  
|                                                                                     |  | March 31, 2003
|                                                                                     |  |               
|Revenue                                                                              |  | $              | 41,793 |  
|                                                                                     |  |                |        |  
|Net loss attributable to Common Shareholders                                         |  | $              | (8,594 | )
|                                                                                     |  |                |        |  
|Basic and diluted net loss per Common Share                                          |  | $              | (0.19  | )
|                                                                                     |  |                |        |  
|Basic and diluted pro forma weighted average
    number of common shares outstanding |  |                | 44,343 |  
|                                                                                     |  |                |        |  

These unaudited condensed pro forma consolidated
results have been prepared for comparative purposes only and are
not necessarily indicative of the actual results of operations
had the acquisitions taken place as of the beginning of the
respective periods or the results of future operations of
Capital. Furthermore, the pro forma results do not give effect
to all cost savings or incremental costs that may occur as a
result of the integration and consolidation of the acquisitions.
As the majority of these businesses were acquired early in the
period, the 2004 pro forma effects were not material.

The operating results of acquired businesses are
included in the consolidated statements of operations from the
dates of acquisition. The assets acquired and liabilities
assumed are recorded under the purchase

9



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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


method of accounting. Details of the net assets
acquired and cash used in business and significant asset
acquisitions during the first quarter of 2004 are as follows
(unaudited):

|                                                              |                                                                  |                                                |        |        |       |  
|------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------- | ------ | ------ | ----- | -
|Purchase Price:                                               |                                                                  |                                                |        |       
|                                                              | Cash                                                             |                                                | $      | 28,858 |      
|                                                              | Seller financed note payable                                     |                                                |        | 5,000  |      
|                                                              | Common stock issued and to be issued                             |                                                |        | 30,578 |      
|                                                              |                                                                  |                                                |        |       
|Total purchase price                                          |                                                                  | $                                              | 64,436 |       
|                                                              |                                                                  |                                                |        |       
|Allocated as follows:                                         |                                                                  |                                                |        |       
|                                                              | Working capital assumed:                                         |                                                |        |        |      
|                                                              |                                                                  | Accounts receivable                            |        | $      | 1,537 |  
|                                                              |                                                                  | Prepaid expenses and other current assets      |        |        | 79    |  
|                                                              |                                                                  | Accounts payable                               |        |        | (835  | )
|                                                              |                                                                  | Accrued expenses and other current liabilities |        |        | (20   | )
|                                                              |                                                                  |                                                |        |       
|                                                              |                                                                  | Net working capital                            |        |        | 761   |  
|                                                              |                                                                  |                                                |        |       
|                                                              | Property and equipment                                           |                                                |        | 4,971  |      
|                                                              | Landfill sites                                                   |                                                |        | 36,293 |      
|                                                              | Deferred taxes                                                   |                                                |        | (334   | )    
|                                                              | Accrued closures, post-closure and other
    obligations assumed |                                                |        | (52    | )    
|                                                              |                                                                  |                                                |        |       
|Net book value of assets acquired and liabilities
    assumed |                                                                  |                                                | 41,639 |       
|                                                              |                                                                  |                                                |        |       
|Excess purchase price to be allocated                         |                                                                  | $                                              | 22,797 |       
|                                                              |                                                                  |                                                |        |       
|Allocated as follows:                                         |                                                                  |                                                |        |       
|                                                              | Goodwill                                                         |                                                | $      | 19,934 |      
|                                                              | Customer relationships and contracts                             |                                                |        | 2,710  |      
|                                                              | Non-competition agreements                                       |                                                |        | 153    |      
|                                                              |                                                                  |                                                |        |       
|Total allocated                                               |                                                                  | $                                              | 22,797 |       
|                                                              |                                                                  |                                                |        |       

We allocate the purchase price of an acquired
business, on a preliminary basis, to the identified assets
acquired based on their estimated fair values at the dates of
acquisition, with any residual amounts allocated to goodwill.
The purchase price allocations are considered preliminary until
we have obtained all required information to complete the
allocation. Although the time required to obtain the necessary
information will vary with circumstances specific to an
individual acquisition, the allocation period for finalizing
purchase price allocations generally does not exceed one year
from the date of consummation of an acquisition. Adjustments to
the allocation of purchase price may decrease those amounts
allocated to goodwill and, as such, may increase those amounts
allocated to other tangible or intangible assets, which may
result in higher depreciation or amortization expense in future
periods.



| |                              
| | -----------------------------
| | Florida Recycling Acquisition

In April 2004, we completed the acquisition of
the issued and outstanding shares of Florida Recycling Services,
Inc. (Florida Recycling) for a purchase price of
$98.5 million in cash, working capital of approximately
$2.2 million, subject to further adjustment, and the
issuance of 9,250,000 Common Shares

10



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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


valued at approximately $51.2 million.
Florida Recyclings operations are based in central
Florida, primarily serving the Orlando, Daytona,
Fort Myers, and Tampa markets.



|   |                       
|-- | ----------------------
|4. | Property and Equipment

Property and equipment consist of the following:

|                                                                           |                                |             |        |              |   |   |        |         |  
|-------------------------------------------------------------------------- | ------------------------------ | ----------- | ------ | ------------ | - | - | ------ | ------- | -
|                                                                           |                                | March 31,   |        | December 31,
|                                                                           |                                | 2004        |        | 2003        
|                                                                           |                                |             |        |             
|                                                                           |                                | (Unaudited) |        |             
|Land and buildings                                                         |                                | $           | 7,723  |              |   | $ | 6,132  |        
|Vehicles                                                                   |                                |             | 66,237 |              |   |   | 62,182 |        
|Containers, compactors, landfill and recycling
    equipment               |                                |             | 42,079 |              |   |   | 39,902 |        
|Furniture, fixtures, other office equipment and
    leasehold improvements |                                |             | 6,791  |              |   |   | 5,927  |        
|                                                                           |                                |             |        |              |   |   |        |        
|                                                                           | Total property and equipment   |             |        | 122,830      |   |   |        | 114,143 |  
|                                                                           | Less: Accumulated depreciation |             |        | (41,760      | ) |   |        | (39,622 | )
|                                                                           |                                |             |        |              |   |   |        |        
|Property and equipment, net                                                |                                | $           | 81,070 |              |   | $ | 74,521 |        
|                                                                           |                                |             |        |              |   |   |        |        



|   |                                                                        
|-- | -----------------------------------------------------------------------
|5. | Landfill Sites, Accrued Closure, Post-Closure
    and Other Obligations



| |               
| | --------------
| | Landfill Sites

Landfill sites consist of the following:

|                      |  |             |         |              |  |   |         |  
|--------------------- |  | ----------- | ------- | ------------ |  | - | ------- | -
|                      |  | March 31,   |         | December 31,
|                      |  | 2004        |         | 2003        
|                      |  |             |         |             
|                      |  | (Unaudited) |         |             
|Landfill sites        |  | $           | 162,876 |              |  | $ | 128,044 |  
|Accumulated depletion |  |             | (10,800 | )            |  |   | (10,503 | )
|                      |  |             |         |              |  |   |         |  
|Landfill sites, net   |  | $           | 152,076 |              |  | $ | 117,541 |  
|                      |  |             |         |              |  |   |         |  

The changes in landfill sites for the three
months ended March 31, 2004 and 2003 are as follows
(unaudited):

|                             |                                              |                    |         |        |   |   |        |        |  
|---------------------------- | -------------------------------------------- | ------------------ | ------- | ------ | - | - | ------ | ------ | -
|                             |                                              |                   
|                             |                                              | Three Months Ended
|                             |                                              | March 31,         
|                             |                                              |                   
|                             |                                              | 2004               |         | 2003  
|                             |                                              |                    |         |       
|Balance, beginning of period |                                              | $                  | 117,541 |        |   | $ | 13,084 |       
|                             | Acquisitions                                 |                    |         | 36,293 |   |   |        |       |  
|                             | Additional landfill site costs               |                    |         | 1,862  |   |   |        | 524    |  
|                             | Additional asset retirement obligations      |                    |         | 116    |   |   |        |       |  
|                             | Depletion                                    |                    |         | (1,122 | ) |   |        | (1,032 | )
|                             | Effect of foreign exchange rate fluctuations |                    |         | (140   | ) |   |        | 1,161  |  
|                             | Change in accounting principle               |                    |         | (2,474 | ) |   |        | 3,657  |  
|                             |                                              |                    |         |        |   |   |        |       
|Balance, end of period       |                                              | $                  | 152,076 |        |   | $ | 17,394 |       
|                             |                                              |                    |         |        |   |   |        |       

11



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CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)




| |                                                        
| | -------------------------------------------------------
| | Accrued Closure, Post-Closure and Other
    Obligations

Accrued closure, post-closure and other
obligations consist of the following:

|                                             |  |             |       |              |  |   |       | 
|-------------------------------------------- |  | ----------- | ----- | ------------ |  | - | ----- | 
|                                             |  | March 31,   |       | December 31,
|                                             |  | 2004        |       | 2003        
|                                             |  |             |       |             
|                                             |  | (Unaudited) |       |             
|Accrued closure and post-closure obligations |  | $           | 5,161 |              |  | $ | 7,737 | 
|Capital lease obligations                    |  |             | 775   |              |  |   | 911   | 
|Other obligations                            |  |             | 139   |              |  |   | 143   | 
|                                             |  |             |       |              |  |   |       | 
|                                             |  | $           | 6,075 |              |  | $ | 8,791 | 
|                                             |  |             |       |              |  |   |       | 

Accrued closure and post-closure obligations
include costs associated with obligations for closure and
post-closure of our landfills. The anticipated timeframe for
paying these costs varies based on the remaining useful life of
each landfill as well as the duration of the post-closure
monitoring period. The changes to accrued closure and
post-closure obligations for the three months ended
March 31, 2004 and 2003 are as follows (unaudited):

|                             |                                              |                    |       |        |   |   |       |       | 
|---------------------------- | -------------------------------------------- | ------------------ | ----- | ------ | - | - | ----- | ----- | 
|                             |                                              |                   
|                             |                                              | Three Months Ended
|                             |                                              | March 31,         
|                             |                                              |                   
|                             |                                              | 2004               |       | 2003  
|                             |                                              |                    |       |       
|Balance, beginning of period |                                              | $                  | 7,737 |        |   | $ | 1,925 |      
|                             | Acquisitions                                 |                    |       | 52     |   |   |       |      | 
|                             | Accretion                                    |                    |       | 123    |   |   |       | 105   | 
|                             | Additional asset retirement obligations      |                    |       | 116    |   |   |       |       | 
|                             | Effect of foreign exchange rate fluctuations |                    |       | (36    | ) |   |       | 286   | 
|                             | Change in accounting principle               |                    |       | (2,831 | ) |   |       | 2,883 | 
|                             |                                              |                    |       |        |   |   |       |      
|Balance, end of period       |                                              | $                  | 5,161 |        |   | $ | 5,199 |      
|                             |                                              |                    |       |        |   |   |       |      



|   |                                     
|-- | ------------------------------------
|6. | Goodwill and Other Intangible Assets

Goodwill and other intangible assets consist of
the following:

|                                                         |                                      |             |         |              |   |   |         |        |  
|-------------------------------------------------------- | ------------------------------------ | ----------- | ------- | ------------ | - | - | ------- | ------ | -
|                                                         |                                      | March 31,   |         | December 31,
|                                                         |                                      | 2004        |         | 2003        
|                                                         |                                      |             |         |             
|                                                         |                                      | (Unaudited) |         |             
|Other intangible assets subject to amortization:         |                                      |             |         |              |   |   |         |       
|                                                         | Customer relationships and contracts |             | $       | 20,569       |   |   | $       | 17,909 |  
|                                                         | Non-competition agreements and other |             |         | 2,760        |   |   |         | 2,653  |  
|                                                         |                                      |             |         |              |   |   |         |       
|                                                         |                                      |             | 23,329  |              |   |   | 20,562  |       
|Less: Accumulated amortization:                          |                                      |             |         |              |   |   |         |       
|                                                         | Customer relationships and contracts |             |         | (1,470       | ) |   |         | (837   | )
|                                                         | Non-competition agreements and other |             |         | (1,019       | ) |   |         | (889   | )
|                                                         |                                      |             |         |              |   |   |         |       
|Other intangible assets subject to amortization,
    net |                                      |             | 20,840  |              |   |   | 18,836  |       
|Goodwill                                                 |                                      |             | 163,380 |              |   |   | 144,544 |       
|                                                         |                                      |             |         |              |   |   |         |       
|Goodwill and other intangible assets, net                |                                      | $           | 184,220 |              |   | $ | 163,380 |       
|                                                         |                                      |             |         |              |   |   |         |       

12



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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


The changes in goodwill for the three months
ended March 31, 2004 and 2003 are as follows:

|                             |                                                            |                              |        |        |   |       |        |      |   |   |         |        |   |   |        |       |  
|---------------------------- | ---------------------------------------------------------- | ---------------------------- | ------ | ------ | - | ----- | ------ | ---- | - | - | ------- | ------ | - | - | ------ | ----- | -
|                             |                                                            |                             
|                             |                                                            | Three Months Ended March 31,
|                             |                                                            |                             
|                             |                                                            |                              |        |       
|                             |                                                            | 2004                         |        |       
|                             |                                                            |                              |        |       
|                             |                                                            | U.S.                         |        | Canada |   | Total |        | 2003
|                             |                                                            |                              |        |        |   |       |        |     
|Balance, beginning of period |                                                            | $                            | 65,822 |        |   | $     | 78,722 |      |   | $ | 144,544 |        |   | $ | 64,365 |      
|                             | Acquisitions                                               |                              |        | 19,600 |   |       |        | 334  |   |   |         | 19,934 |   |   |        | 811   |  
|                             | Effect of foreign exchange rate fluctuations               |                              |        |       |   |       |        | (889 | ) |   |         | (889   | ) |   |        | 4,807 |  
|                             | Other adjustments related to prior period
    acquisitions |                              |        | (209   | ) |       |        |     |   |   |         | (209   | ) |   |        | (419  | )
|                             |                                                            |                              |        |        |   |       |        |      |   |   |         |        |   |   |        |      
|Balance, end of period       |                                                            | $                            | 85,213 |        |   | $     | 78,167 |      |   | $ | 163,380 |        |   | $ | 69,564 |      
|                             |                                                            |                              |        |        |   |       |        |      |   |   |         |        |   |   |        |      



|   |             
|-- | ------------
|7. | Other Assets

Other assets consist of the following:

|                                                                                                                                                                                |  |             |        |              |  |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | ------------ |  | - | ------ | 
|                                                                                                                                                                                |  | March 31,   |        | December 31,
|                                                                                                                                                                                |  | 2004        |        | 2003        
|                                                                                                                                                                                |  |             |        |             
|                                                                                                                                                                                |  | (Unaudited) |        |             
|Debt and redeemable Preferred Stock issue costs,
    net of accumulated interest accretion of $701 as of
    March 31, 2004, and $496 as of December 31, 2003,
    respectively |  | $           | 2,562  |              |  | $ | 2,096  | 
|Acquisition deposits and deferred acquisition
    costs                                                                                                                         |  |             | 21,501 |              |  |   | 20,182 | 
|                                                                                                                                                                                |  |             |        |              |  |   |        | 
|                                                                                                                                                                                |  | $           | 24,063 |              |  | $ | 22,278 | 
|                                                                                                                                                                                |  |             |        |              |  |   |        | 



|   |     
|-- | ----
|8. | Debt

Debt consists of the following:

|                                                                                                                               |  |             |         |              |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ------- | ------------ |  | - | -------- | -
|                                                                                                                               |  | March 31,   |         | December 31,
|                                                                                                                               |  | 2004        |         | 2003        
|                                                                                                                               |  |             |         |             
|                                                                                                                               |  | (Unaudited) |         |             
|364-day Senior Secured Credit Facility, interest
    at 9.0% per annum, due December 29, 2004 and repaid on
    April 30, 2004 |  | $           | 184,125 |              |  | $ | 172,125  |  
|Other subordinated promissory notes payable,
    interest at 6.67% and 2.10%, due through June 2017                            |  |             | 8,248   |              |  |   | 3,285    |  
|                                                                                                                               |  |             |         |              |  |   |          |  
|                                                                                                                               |  |             | 192,373 |              |  |   | 175,410  |  
|Less: Current portion                                                                                                          |  |             | (6,158  | )            |  |   | (172,280 | )
|                                                                                                                               |  |             |         |              |  |   |          |  
|Long-term portion                                                                                                              |  | $           | 186,215 |              |  | $ | 3,130    |  
|                                                                                                                               |  |             |         |              |  |   |          |  



| |                                         
| | ----------------------------------------
| | New Senior Secured Credit
    Facilities

On April 30, 2004, Waste Services entered
into new Senior Secured Credit Facilities (the Credit
Facilities) with a syndicate of lenders. The Credit
Facilities consist of a five-year revolving credit facility in
the amount of $60.0 million, a portion of which will be
available to Capital and its Canadian subsidiaries, and a
seven-year term loan facility in the amount of
$100.0 million. The Credit Facilities bear interest based
upon a spread over base rate or Eurodollar loans, as defined, at
our option. The Credit Facilities are secured by substantially
all of Waste Services assets and the assets of its
U.S. restricted subsidiaries as well as the shares of
capital stock of the U.S. restricted subsidiaries held by
Waste Services. Prior to our Migration Transaction,

13



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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


the Credit Facilities will be guaranteed by our
current parent, Capital Environmental Resource Inc., and
Capitals Canadian subsidiaries and secured by
substantially all of their assets (including shares of capital
stock of Waste Services). After the completion of our Migration
Transaction, Capital and its Canadian subsidiaries will become
Waste Services foreign subsidiaries and will no longer
guarantee or pledge all of their assets except that their
guarantees and pledges will continue in support of the portion
of the revolving credit facility available to Capital and its
Canadian subsidiaries. Furthermore, 65% of the common shares of
Waste Services first tier non-U.S. subsidiaries will
be pledged to secure obligations under the Credit Facilities.

Our Credit Facilities contain certain financial
and other covenants that restrict our ability to, among other
things, make capital expenditures, incur indebtedness, incur
liens, dispose of property, repay debt, pay dividends,
repurchase shares, and make certain acquisitions. Our financial
covenants include (i) minimum consolidated interest
coverage; (ii) maximum total leverage and
(iii) maximum senior secured leverage.



| |                              
| | -----------------------------
| | New Senior Subordinated Notes

On April 30, 2004, Waste Services completed
a private offering of 9 1/2% Senior Subordinated Notes
(Subordinated Notes) due 2014 for gross proceeds of
$160.0 million. The Subordinated Notes mature on
April 15, 2014. Interest on the Subordinated Notes is
payable semi annually commencing October 15, 2004. The
Subordinated Notes are redeemable, in whole or in part, at our
option, on or after April 15, 2009, at a redemption price
of 104.75% of the principal amount, declining rateably in annual
increments to par on or after April 15, 2012, together with
accrued interest to the redemption date. In addition, prior to
April 15, 2007, we may redeem up to 35.0% of the aggregate
principal amount of the Subordinated Notes with the proceeds of
certain equity offerings, at a redemption price equal to 109.5%
of the principal amount. Upon a change of control of Waste
Services, as such term is defined in the Indenture, Waste
Services is required to offer to repurchase all the Subordinated
Notes at 100.0% of the principal amount, together with accrued
interest and liquidated damages, if any, and obtain the consent
of our senior lenders to such payment or repay our indebtedness
under our Credit Facilities.

The Subordinated Notes are unsecured and are
subordinate to our existing and future senior secured
indebtedness, including our Credit Facilities, structurally
subordinated to existing and future indebtedness of Waste
Services non-guarantor subsidiaries, rank equally with any
unsecured senior indebtedness and senior to our existing and
future subordinated indebtedness.

The Subordinated Notes contain certain covenants
that, in certain circumstances and subject to certain
limitations and qualifications, restrict, among other things
(i) the incurrence of additional debt; (ii) the
payment of dividends and repurchases of stock; (iii) the
issuance of preferred stock and the issuance of stock of our
subsidiaries; (iv) certain investments; (v) the
repurchase of Waste Services Preferred Stock;
(vi) transactions with affiliates and (vii) certain
sales of assets.

Our obligations with respect to the Subordinated
Notes, including principal, interest, premium, if any, and
liquidated damages, if any, are fully and unconditionally
guaranteed on an unsecured, senior subordinated basis by all of
Waste Services existing and future domestic restricted
subsidiaries. Pending completion of the Migration Transaction,
Waste Services obligations with respect to the
Subordinated Notes will also be guaranteed by our current
parent, Capital Environmental Resource Inc., and each of
Capitals Canadian subsidiaries. After completion of the
Migration Transaction, Capital and its Canadian subsidiaries
will become Waste Services foreign subsidiaries and will
no longer guarantee the Subordinated Notes.

We also entered into a Registration Rights
Agreement with the initial purchasers of the Subordinated Notes
in which we agreed to (i) file a registration statement
with respect to the Subordinated Notes within 120 days of
the closing date of the issuance of the notes, or the issuance
date, pursuant to which we will exchange the Subordinated Notes
for registered notes of Waste Services with terms identical to
the

14



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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


Subordinated Notes; (ii) have such
registration statement declared effective within 210 days
of the issuance date; (iii) maintain the effectiveness of
such registration statement for minimum periods specified in the
agreement and (iv) file a shelf registration statement in
the circumstances and within the time periods specified in the
agreement. If we do not comply with these obligations, we will
be required to pay liquidated damages, in cash, in an amount
equal to $0.05 per week per $1,000 in principal amount, of
the unregistered Subordinated Notes, for each week that the
default continues for the first 90-days following default.
Thereafter, the amount of liquidated damages increases by an
additional $0.05 per week per $1,000 in principal amount of
unregistered Subordinated Notes for each subsequent 90-day
period until all defaults have been cured, to a maximum of
$0.50 per week per $1,000 in principal amount of
unregistered Subordinated Notes outstanding. Liquidated damages,
if any, are payable at the same time as interest payments due
under the Subordinated Notes.



| |                                                                              
| | -----------------------------------------------------------------------------
| | 364-day Senior Secured Credit Facility
    (repaid in full on April 30, 2004)

On December 31, 2003 Waste Services entered
into a $220.0 million 364-day Senior Secured Credit
Facility (the 364-day Facility) comprised of a
$195.0 million term loan and a $25.0 million revolving
credit facility, which was secured by substantially all of our
current and future acquired assets. Initial borrowings under the
364-day Facility were used to finance the acquisition of certain
of the Allied Assets and to repay our prior senior credit
facility in full. The 364-day Facility bore interest at
9.0% per annum and was repaid with the proceeds of the
Credit Facilities, Subordinated Notes and an equity private
placement. As of March 31, 2004, pursuant to the provisions
of SFAS No. 6 Classifications of Short-Term
Obligations Expected to be Refinanced, we have classified
the 364-day Facility as long-term, net of amounts expected to be
currently payable under the Credit Facilities.



|   |                                                       
|-- | ------------------------------------------------------
|9. | Cumulative Mandatorily Redeemable Preferred
    Shares

In May 2003, Waste Services issued
55,000 shares of redeemable Preferred Stock (the
Waste Services Preferred Stock) to Kelso Investment
Associates VI, L.P. and KEP VI, LLC (collectively
Kelso), pursuant to the terms of an agreement dated
as of May 6, 2003, as amended in February 2004, (the
Waste Services Subscription Agreement), at a price
of $1,000 per share. Waste Services also issued to Kelso
7,150,000 warrants to purchase shares of Common Stock (on a
one-for-one basis) of Waste Services for $3.00 per share.
The warrants are exercisable at any time following the
completion of the Migration Transaction. The issuance of the
Waste Services Preferred Stock resulted in proceeds of
approximately $49.5 million, net of fees of approximately
$5.5 million. The shares of Waste Services Preferred stock
are non-voting. The Waste Services Preferred Stock entitles the
holders to a liquidation preference of $1,000 per share and
a cumulative cash dividend of 17.75% per annum (compounding
and accruing quarterly in arrears). The liquidation preference
approximated $64.4 million as of March 31, 2004. As we
are not permitted to declare and pay cash dividends pursuant to
the terms of our Credit Facilities, the dividend payments will
accrue. The Waste Services Preferred Stock, including all
accrued and unpaid dividends, must be redeemed in full by no
later than May 6, 2015. Until May 6, 2006, we may
redeem all or any part of the Waste Services Preferred Stock on
payment of the sum of $1,000 per share plus accrued and
unpaid dividends calculated as if the Waste Services Preferred
Stock were redeemed on May 6, 2006, or approximately
$92.7 million. If we do not exercise our option to redeem
all of the Waste Services Preferred Stock by May 6, 2009,
Kelso may require Capital to initiate a sale of Waste Services
or of its assets on terms acceptable to our board consistent
with the exercise of their fiduciary duties. Pursuant to an
amendment to the Certificate of Designations of Waste Services
dated April 30, 2004, if Waste Services determines, after
conducting a sale process, that any such sale would not yield
sufficient proceeds to repay in full the indebtedness then
outstanding under our Credit Facilities and the redemption
amount of our Subordinated Notes issued on April 30, 2004,
or at least $320.0 million, then Waste Services may elect
to delay such sale. The sale date may be delayed until the
earliest to occur of (i) the final

15



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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


maturity date of the Subordinated Notes
(April 15, 2014); (ii) the date on which our Credit
Facilities and the Subordinated Notes are fully repaid or
otherwise satisfied or (iii) a sale of Waste Services. We
refer to this date as the delayed sale date. If we do not
initiate and complete a sale of Waste Services or its assets
within 20 months of initiation of the sale process by the
holders of Waste Services Preferred Stock, then on notice from
the holders of the Waste Services Preferred Stock, all
outstanding Waste Services Preferred Stock will become due and
payable on the first anniversary of the date on which the
holders of Waste Services Preferred Stock gave notice requiring
the initiation of a sale process, for a liquidation amount of
1.20 times the liquidation preference of $1,000 per share.
If the sale day has been delayed, then Waste Services is not
required to pay this increased liquidation amount until the
delayed sale date.

Also pursuant to the Amended Certificate of
Designations, if Waste Services becomes subject to a liquidation
or insolvency event (as such terms are defined in our Amended
and Restated Credit Agreement dated April 30, 2004) or in
the event of a change of control of Waste Services (as such term
is defined in the Amended Certificate of Designations), all
payments and other distributions to holders of Waste Services
Preferred Stock will be subordinate to the repayment in full of
our Credit Facilities. This provision does not prohibit any
accrual or increase in the dividend rate or in the liquidation
preference of the Waste Services Preferred Stock as provided for
in the Amended Certificate of Designations, or the distribution
of additional shares or other equity securities to the holders
of Waste Services Preferred Stock, so long as such additional
shares or other equity securities are subject to at least
equivalent subordination provisions. In addition, the Amended
Certificate of Designations prohibits us from making any payment
or distribution to the holders of Waste Services Preferred Stock
in the event of a sale of Waste Services or its assets, or the
exercise by the holders of Waste Services Preferred Stock of
their right to require payment of the liquidation amount of
their shares as a result of the failure to consummate a sale of
Waste Services as described in the preceding paragraph, unless
such payment or distribution is expressly permitted pursuant to
the terms of the agreement then governing our Credit Facilities.

Under the terms of the Waste Services
Subscription Agreement, as amended, if we do not complete the
Migration Transaction by June 30, 2004, the dividend
payable on the Waste Services Preferred Stock issued to Kelso
will increase by 1.0% per annum, from 17.75%, for every
month that the Migration Transaction is delayed, up to a maximum
increase of an additional 12.0% per annum. We may also be
required to issue to Kelso an additional 250,000 warrants per
month for each month that the Migration Transaction is delayed
after June 30, 2004, up to an additional 6,000,000 warrants
to purchase Waste Services common stock, at an exercise price of
$0.01 per share. The increase in the dividend payable on
the Waste Services Preferred Stock issued to Kelso would
increase the amount to be paid to Kelso on the redemption of the
Waste Services Preferred Stock and would have a material adverse
effect on our financial condition. By the terms of the
agreement, as amended, if the Migration Transaction is not
completed at all, Kelso may also require us to exchange the
existing 7,150,000 warrants to purchase common stock of Waste
Services, and any of the additional warrants for common stock of
Waste Services issued as a result of our completing the
Migration Transaction after June 30, 2004, for warrants to
purchase Capitals Common Shares.



|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies



| |                    
| | -------------------
| | Environmental Risks

We are subject to liability for environmental
damage that our solid waste facilities may cause, including
damage to neighboring landowners or residents, particularly as a
result of the contamination of soil, groundwater or surface
water, including damage resulting from conditions existing prior
to our acquisition of such facilities. Pollutants or hazardous
substances whose transportation, treatment, or disposal was
arranged by Capital or our predecessors, may also subject us to
liability for any off-site environmental contamination caused by
these pollutants or hazardous substances.

16



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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


Any substantial liability for environmental
damage incurred by us could have a material adverse effect on
our financial condition, results of operations or cash flows. As
of the date of these condensed consolidated financial
statements, we estimate the range of reasonably possible losses
related to environmental matters to be insignificant and we are
not aware of any such environmental liabilities that would be
material to our operations or financial condition.



| |                  
| | -----------------
| | Legal Proceedings

In our normal course of business and as a result
of the extensive governmental regulation of the solid waste
industry, we may periodically become subject to various judicial
and administrative proceedings involving federal, provincial,
state or local agencies. In these proceedings, an agency may
seek to impose fines on us or revoke or deny renewal of an
operating permit or license held by us. From time to time, we
may also be subject to actions brought by citizens groups,
adjacent landowners or residents in connection with the
permitting and licensing of transfer stations and landfills or
allegations related to environmental damage or violations of the
permits and licenses pursuant to which we operate.

In addition, we may become party to various
claims and suits for alleged damages to persons and property,
alleged violations of certain laws and alleged liabilities
arising out of matters occurring during the normal operation of
a waste management business. We are currently involved in
pending litigation with Canadian Waste Services Inc., one of our
competitors, which is more fully described in our financial
statement for the year ended December 31, 2003, as filed on
Form 20-F with the Securities and Exchange Commission. The
status of these actions, as well as the facts and circumstances
related to the suits, remain substantially unchanged from those
disclosed in our Form 20-F. To date, no statements of
defense have been filed, and documents have not been exchanged.
We intend to vigorously defend the actions with respect to both
liability and damages. As of the date of this report, we do not
believe that the reasonably possible losses in respect to all or
any of these matters would have a material adverse impact on our
business, financial condition, results of operations or cash
flows and accordingly, we have not established a provision in
the financial statements for these matters.



| |                                                  
| | -------------------------------------------------
| | Surety Bonds, Letters of Credit and
    Insurance

Municipal solid waste services contracts, permits
and licenses to operate transfer stations, landfills and
recycling facilities may require performance or surety bonds,
letters of credit or other means of financial assurance to
secure contractual performance. As of March, 31, 2004 and
December 31, 2003, we had provided customers and various
regulatory authorities with such bonds and letters of credit
amounting to approximately $20.0 million and
$19.6 million, respectively, to collateralize our
obligations.

Our U.S.-based automobile, general liability and
workers compensation insurance coverage is subject to
certain deductible limits. Claims in excess of such deductible
levels are fully insured subject to our policy limits. However,
we have a limited claims history for our U.S. operations
and it is reasonably possible that recorded reserves may not be
adequate to cover future payment of claims. Adjustments, if any,
to our reserves will be reflected in the period in which the
adjustments are known. As of March 31, 2004 we have posted
a letter of credit with our U.S. insurer of approximately
$2.3 million to cover the liability for losses within the
deductible limit. Separately, we have deposited
$0.3 million with our third-party claims administrator to
settle claims as incurred. We are required to replenish the
escrow fund to its current level as it is depleted.



| |                                   
| | ----------------------------------
| | Other Contractual
    Arrangements

During 2003, we issued 600,000 Common Shares as
part of the purchase price of an acquisition. In connection with
this acquisition, we entered into a reimbursement agreement
whereby for a period of one year

17



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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


after the second anniversary of the closing date,
we will reimburse the seller for the loss on sale of shares
below $4.75 per share.



|    |              
|--- | -------------
|11. | Capital Stock



| |              
| | -------------
| | Common Shares

During the first quarter of 2004, we issued
5,298,370 Common Shares in connection with acquisitions valued
at $30.3 million and 70,704 Common Shares upon exercise of
options and warrants for proceeds of $0.2 million.
Additionally, 38,430 Common Shares valued at $0.2 million
are to be issued subsequent to March 31, 2004 for an
acquisition that was completed during the first quarter of 2004.

On April 30, 2004, we raised approximately
$50.7 million, after deducting expenses of approximately
$2.9 million, from the sale of 13,400,000 Common Shares of
Capital and warrants to purchase 1,340,000 Common Shares of
Capital in private placement transactions to certain investors.
Sanders Morris Harris Inc. acted as the placement agent for the
issuance and was paid a placement agent fee of approximately
$2.7 million. Don A. Sanders, one of our directors, is a
principal of Sanders Morris Harris Inc. We also entered into an
agreement with the investors in the private placement in which
we agreed to file a registration statement for the 13,400,000
Common Shares and the 1,340,000 Common Shares issuable upon
exercise of the warrants and have that registration statement
declared effective within 120 days from April 30, 2004. If
we do not comply with these registration requirements, we will
be required to pay liquidated damages equal to 1.0% of the
value, as defined in the agreement, of the unregistered Common
Shares for each month that the Common Shares are unregistered.
Since the liquidated damages would be payable in cash, until the
Common Shares are registered the proceeds from the financing
will be classified outside of shareholders equity.



| |                                                               
| | --------------------------------------------------------------
| | Employee and Director Stock Option Plans
    and Option Grants

We have stock-based compensation plans accounted
for under the recognition and measurement principles of
Accounting Principles Board Opinion (APB)
No. 25 Accounting for Stock Issued to
Employees, and related interpretations. Pro forma
information regarding the impact of stock-based compensation on
net income and earnings per share is required by
SFAS No. 123 Accounting for Stock-Based
Compensation, and SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure.
Such unaudited pro forma information, determined as if we had
accounted for our employee stock options under the fair value
recognition provisions of SFAS No. 123, is illustrated
in the following table (unaudited):

|                                                                                   |             |                    |         |       |   |   |        |       |  
|---------------------------------------------------------------------------------- | ----------- | ------------------ | ------- | ----- | - | - | ------ | ----- | -
|                                                                                   |             |                   
|                                                                                   |             | Three Months Ended
|                                                                                   |             | March 31,         
|                                                                                   |             |                   
|                                                                                   |             | 2004               |         | 2003 
|                                                                                   |             |                    |         |      
|Net loss attributable to Common Shareholders as
    reported                       |             | $                  | (10,734 | )     |   | $ | (8,313 | )    
|Stock-based employee compensation expense
    pursuant to SFAS No. 123, net of tax |             |                    | (2,415  | )     |   |   | (428   | )    
|                                                                                   |             |                    |         |       |   |   |        |      
|Pro forma net loss attributable to Common
    Shareholders                         |             | $                  | (13,149 | )     |   | $ | (8,741 | )    
|                                                                                   |             |                    |         |       |   |   |        |      
|Basic and diluted loss per share:                                                  |             |                    |         |       |   |   |        |      
|                                                                                   | As reported |                    | $       | (0.15 | ) |   | $      | (0.24 | )
|                                                                                   |             |                    |         |       |   |   |        |      
|                                                                                   | Pro forma   |                    | $       | (0.19 | ) |   | $      | (0.25 | )
|                                                                                   |             |                    |         |       |   |   |        |      

18



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##### Table of Contents



CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


The fair value of options granted to
March 31, 2004 was estimated using the Black-Scholes option
pricing model using the following assumptions:

|                                       |  |                    |         |      |  |  |         |  
|-------------------------------------- |  | ------------------ | ------- | ---- |  |  | ------- | -
|                                       |  |                   
|                                       |  | Three Months Ended
|                                       |  | March 31,         
|                                       |  |                   
|                                       |  | 2004               |         | 2003
|                                       |  |                    |         |     
|Annual dividend yield                  |  |                    |        |      |  |  |        |  
|Weighted-average expected life (years) |  |                    | 3 years |      |  |  | 3 years |  
|Risk-free interest rate                |  |                    | 2.97    | %    |  |  | 3.46    | %
|                                       |  |                    | to 4.62 | %    |  |  | to 4.96 | %
|Volatility                             |  |                    | 72      | %    |  |  | 72      | %

Compensation expense recognized for stock options
subject to variable accounting is based on the intrinsic value
(the difference between the exercise price and quoted market
price) of the options at the end of each reporting period.
Changes in the intrinsic value are recognized until such options
are exercised, expired or forfeited.

Details of Capitals 1997 and 1999 Stock
Option Plans are described in our consolidated financial
statements for the year ended December 31, 2003 filed on
Form 20-F. There are no options outstanding under the 1997
Stock Option Plan and we will not issue any new options under
that plan. Our options are denominated in U.S. and Canadian
dollars. During the quarter ended March 31, 2004, options
to purchase 2,974,500 Common Shares were granted. As of
March 31, 2004, the weighted average exercise price for
options outstanding was $4.74 and C$6.47 for U.S. and Canadian
dollar denominated options, respectively. During the quarter
ended March 31, 2004, 42,500 options were exercised and
27,694 options expired or were terminated. As of March 31,
2004, the aggregate number of options outstanding entitled
holders to purchase 10,711,005 Common Shares at prices
ranging from $3.12 to $12.00 and C$4.05 to C$18.05 for U.S. and
Canadian dollar denominated options, respectively.



|    |                            
|--- | ---------------------------
|12. | Comprehensive Income (Loss)

Comprehensive income (loss) includes the effects
of foreign currency translation. Comprehensive income (loss) for
the three months ended March 31, 2004 and 2003 are as
follows (unaudited):

|                                        |  |                    |         |      |  |   |       | 
|--------------------------------------- |  | ------------------ | ------- | ---- |  | - | ----- | 
|                                        |  |                   
|                                        |  | Three Months Ended
|                                        |  | March 31,         
|                                        |  |                   
|                                        |  | 2004               |         | 2003
|                                        |  |                    |         |     
|Net income (loss)                       |  | $                  | (10,734 | )    |  | $ | 219   | 
|Foreign currency translation adjustment |  |                    | (2,166  | )    |  |   | 5,974 | 
|                                        |  |                    |         |      |  |   |       | 
|Comprehensive income (loss)             |  | $                  | (12,900 | )    |  | $ | 6,193 | 
|                                        |  |                    |         |      |  |   |       | 



|    |                    
|--- | -------------------
|13. | Segment Information

We have determined our operating and reporting
segments pursuant to the requirements of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. In making this determination, we considered
our organization/reporting structure and the information used by
our chief operating decision makers to make decisions about
resource allocation and performance assessment. We are organized
along geographic locations or regions. The Canadian operations
are organized between two regions: Eastern and Western Canada.
We believe our Canadian geographic segments meet the
Aggregation Criteria set forth in
SFAS No. 131 for the following reasons: (i) the
nature of the service, waste collection and disposal, is
economically the same and transferable across locations;
(ii) the type and class of customer is

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CAPITAL ENVIRONMENTAL RESOURCE INC.


NOTES TO UNAUDITED CONDENSED
CONSOLIDATED

FINANCIAL
STATEMENTS  (Continued)


consistent among regions/districts;
(iii) the methods used to deliver services are essentially
the same (e.g. containers collect waste at market locations and
trucks collect and transfer waste to landfills) and
(iv) the regulatory environment is consistent within Canada.

The tables below present certain segment
information on Capitals geographic segments as of, and for
the three months ended March 31, 2004 and 2003:

|                                                                                                |  |        |         |               |  |   |       |   |  |         |         |   |  |  |        |   |  |   |         | 
|----------------------------------------------------------------------------------------------- |  | ------ | ------- | ------------- |  | - | ----- | - |  | ------- | ------- | - |  |  | ------ | - |  | - | ------- | 
|                                                                                                |  |        |         |               |  |  
|                                                                                                |  | Canada |         | United States |  |  
|                                                                                                |  |        |         |               |  |  
|                                                                                                |  | $      |         | %             |  | $ |       | % |  | Total $
|                                                                                                |  |        |         |               |  |   |       |   |  |        
|March 31, 2004                                                                                  |  |        |         |               |  |   |       |   |  |         |         |   |  |  |        |   |  |   |         | 
|Revenue                                                                                         |  | $      | 30,317  |               |  |   | 60.3  | % |  | $       | 20,000  |   |  |  | 39.7   | % |  | $ | 50,317  | 
|Operating and other expenses                                                                    |  |        | 29,185  |               |  |   | 58.2  |   |  |         | 20,927  |   |  |  | 41.8   |   |  |   | 50,112  | 
|Income (loss) from operations                                                                   |  |        | 1,132   |               |  |   | 552.2 |   |  |         | (927    | ) |  |  | (452.2 | ) |  |   | 205     | 
|Depreciation, depletion and amortization                                                        |  |        | 3,446   |               |  |   | 63.0  |   |  |         | 2,026   |   |  |  | 37.0   |   |  |   | 5,472   | 
|Interest expense                                                                                |  |        | 53      |               |  |   | 0.8   |   |  |         | 6,263   |   |  |  | 99.2   |   |  |   | 6,316   | 
|Cumulative mandatorily redeemable preferred stock
    dividends and amortization of issue costs |  |        |        |               |  |   |      |   |  |         | 4,019   |   |  |  | 100.0  |   |  |   | 4,019   | 
|Total assets                                                                                    |  |        | 214,352 |               |  |   | 42.3  |   |  |         | 292,340 |   |  |  | 57.7   |   |  |   | 506,692 | 
|Long-lived assets                                                                               |  |        | 177,027 |               |  |   | 40.1  |   |  |         | 264,402 |   |  |  | 59.9   |   |  |   | 441,429 | 
|Expenditures for property, equipment and landfills                                              |  |        | 3,852   |               |  |   | 41.8  |   |  |         | 5,355   |   |  |  | 58.2   |   |  |   | 9,207   | 

|                                                       |  |        |        |               |  |   |       |   |  |         |   |  |  |  |   |   |  |   |        | 
|------------------------------------------------------ |  | ------ | ------ | ------------- |  | - | ----- | - |  | ------- | - |  |  |  | - | - |  | - | ------ | 
|                                                       |  |        |        |               |  |  
|                                                       |  | Canada |        | United States |  |  
|                                                       |  |        |        |               |  |  
|                                                       |  | $      |        | %             |  | $ |       | % |  | Total $
|                                                       |  |        |        |               |  |   |       |   |  |        
|March 31, 2003                                         |  |        |        |               |  |   |       |   |  |         |   |  |  |  |   |   |  |   |        | 
|Revenue                                                |  | $      | 25,280 |               |  |   | l00.0 | % |  | $       |  |  |  |  |  | % |  | $ | 25,280 | 
|Operating expenses                                     |  |        | 24,216 |               |  |   | 100.0 |   |  |         |  |  |  |  |  |   |  |   | 24,216 | 
|Income from operations                                 |  |        | 1,064  |               |  |   | 100.0 |   |  |         |  |  |  |  |  |   |  |   | 1,064  | 
|Depreciation, depletion and amortization               |  |        | 3,225  |               |  |   | 100.0 |   |  |         |  |  |  |  |  |   |  |   | 3,225  | 
|Interest expense                                       |  |        | 1,320  |               |  |   | 100.0 |   |  |         |  |  |  |  |  |   |  |   | 1,320  | 
|Expenditures for
    property, equipment and landfills |  |        | 2,768  |               |  |   | 100.0 |   |  |         |  |  |  |  |  |   |  |   | 2,768  | 

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with the Unaudited Condensed Consolidated Financial
Statements and Notes thereto included elsewhere herein as well
as our annual report on Form 20-F for the year ended
December 31, 2003, as filed with the Securities and
Exchange Commission, including the factors set forth in the
section titled Forward Looking Statements and under
the heading Risk Factors in our annual report as
well as other filings made with the Securities and Exchange
Commission.

Overview

We are a multi-regional, integrated solid waste
services company, providing collection, transfer, landfill
disposal and recycling services for commercial, industrial and
residential customers in the United States and Canada. In 2003,
we initiated a disposal-based growth strategy to enter the
U.S. solid waste market and establish, vertically
integrated market positions. Under this strategy, we enter
geographic markets with attractive growth or competitive
characteristics by acquiring and developing landfill disposal
capacity, then acquiring and developing waste collection and
transfer operations. In the past 12 months, we have
implemented this strategy by acquiring large municipal solid
waste landfill developments and collection operations in three
geographic markets in the United States: northern and central
Florida, including Orlando, Tampa and Jacksonville; Phoenix and
Tucson, Arizona; and Houston, Texas. We have acquired large
municipal solid waste landfill developments in each of these
markets.

As part of our business strategy to expand into
the U.S., we intend to enter into a migration transaction (the
Migration Transaction). Under the Migration
Transaction, our corporate structure will be reorganized so that
Waste Services, Inc. (Waste Services), currently a
subsidiary of Capital, will become the parent company of our
corporate group.

We were founded in May 1997 and began operations
in June 1997 when we acquired selected solid waste assets and
operations in Canada from Canadian Waste Services Inc. From the
time of commencing operations, we acquired a number of solid
waste service operations in Canada and the U.S. In the
first half of 2001, we sold our operations in the northeastern
United States and exited the U.S. market because those
U.S. operations were exclusively collection operations,
with no related disposal opportunity and did not provide
sufficient cash flow and investment returns.

Our corporate strategy changed substantially in
September 2001 when we appointed our current Chairman and CEO,
David Sutherland-Yoest, and our new board members. Our new
management and board of directors identified an opportunity to
create a multi-regional, vertically integrated solid waste
company by expanding into high growth markets in the
U.S. Since September 2001, we have raised in excess of
$200.0 million in various private equity placements
pursuing this strategy and have invested in three newly
permitted or to-be-permitted large landfill disposal facilities
strategically located in what we believe to be high growth
U.S. markets.

Sources of Revenue

Our revenue consists primarily of fees charged to
customers for solid waste collection, landfill disposal,
transfer and recycling services. We expect our percentage mix of
landfill and transfer station revenue to increase during the
remainder of 2004 relative to our collection revenue as we
increase disposal volume at our JED landfill in Florida, which
opened in January 2004, and commence commercial operations at
our landfills

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in Arizona and Texas later in 2004. Our revenue
mix for the three months ended March 31, 2004 and 2003 is
as follows:


|                             |  |                 |       |      |  |  |       |  
|---------------------------- |  | --------------- | ----- | ---- |  |  | ----- | -
|                             |  |                
|                             |  | Three Months   
|                             |  | Ended March 31,
|                             |  |                
|                             |  | 2004            |       | 2003
|                             |  |                 |       |     
|Collection                   |  |                 | 79.8  | %    |  |  | 81.6  | %
|Landfill disposal            |  |                 | 6.8   |      |  |  | 8.4   |  
|Transfer station             |  |                 | 5.0   |      |  |  | 5.8   |  
|Material recovery facilities |  |                 | 4.6   |      |  |  | 3.7   |  
|Other specialized services   |  |                 | 3.8   |      |  |  | 0.5   |  
|                             |  |                 |       |      |  |  |       |  
|Total                        |  |                 | 100.0 | %    |  |  | 100.0 | %
|                             |  |                 |       |      |  |  |       |  

We derive a substantial portion of our collection
revenue from services provided to commercial, industrial and
residential customers that are generally performed under service
agreements or pursuant to contracts with municipalities. We
recognize revenue when services are rendered. Amounts billed to
customers prior to providing the related services are reflected
as deferred revenue and reported as revenue in the periods in
which the services are rendered.

We provide collection services for commercial and
industrial customers generally under one to three year service
agreements. We determine the fees we charge our customers based
on a variety of factors, including collection frequency; level
of service; route density; the type, volume and weight of the
waste collected; type of equipment and containers furnished; the
distance to the disposal or processing facility; the cost of
disposal or processing and prices charged by competitors for
similar services. Our contracts with commercial and industrial
customers typically allow us to pass on increased costs
resulting from variable items such as disposal and fuel costs
and surcharges. Our ability to pass on cost increases is
sometimes limited by the terms of our contracts.

We provide residential waste collection services
through a variety of contractual arrangements, including
contracts with municipalities, landlords and homeowners
associations or subscription arrangements with homeowners. Our
contracts with municipalities are typically for a term of up to
five years and contain a formula, generally based on a
predetermined published price index, for automatic adjustments
to fees to cover increases in some, but not all, of our
operating costs. Certain of our contracts with municipalities
contain renewal provisions. The fees we charge for residential
solid waste collection services provided on a subscription basis
are based primarily on route density, the frequency and level of
service, the distance to the disposal or processing facility,
the cost of disposal or processing and prices we charge in the
market for similar services.

We charge our landfill and transfer station
customers a tipping fee on a per ton basis for disposing of
their solid waste at our transfer stations and landfills. We
generally base our landfill tipping fees on market factors and
the type and weight of, or volume of the waste deposited. We
generally base our transfer station tipping fees on market
factors and the cost of processing the waste deposited at the
transfer station, the cost of transporting the waste to a
disposal facility and the cost of disposal.

Material recovery facilities generate revenue
from the sale of recyclable commodities. In an effort to reduce
our exposure to commodity price fluctuations on recycled
materials, where competitive pressures permit, we charge
collection or processing fees for recycling volume collected
from our customers.

Expense Structure

Our cost of operations primarily includes tipping
fees and related disposal costs, labor and related benefit
costs, equipment maintenance, fuel, vehicle insurance and
landfill capping, closure and post-closure costs. Our strategy
is to create vertically integrated operations in each of our
markets which will allow us to internalize our own collection
volume into our landfills and transfer stations. Internalization
lowers our disposal costs by allowing us to eliminate tipping
fees otherwise paid to an independent landfill operator. We
believe internalization provides us with a competitive advantage
by allowing us to be a low cost provider in our

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markets. Historically, our internalization has
been relatively low. However, we expect our internalization will
increase during the remainder of 2004 and beyond in connection
with our disposal based acquisition strategy and our recent
landfill and landfill development acquisitions in Florida,
Arizona and Texas. We expect that as our internalization
increases our operating margins will improve.


In markets where we do not have our own
landfills, we seek to secure long-term disposal arrangements
with municipalities or private owners of landfills or transfer
stations. In these markets, our ability to maintain competitive
prices for our collection services is generally dependent upon
our ability to secure low cost disposal pricing. If owners of
third party disposal sites discontinue our arrangements, we
would have to seek alternative disposal sites which could impact
our profitability and cash flow. In addition, if third party
disposal sites increase their tipping fees and we are unable to
pass these increases on to our collection customers, our
profitability and cash flow would be negatively impacted.

We believe the age and condition of a fleet has a
significant impact on operating costs including, but not limited
to, repairs and maintenance, insurance and driver training and
retention costs. Through capital investment, we seek to maintain
an average fleet age of five to six years. We believe this
enables us to minimize our repair and maintenance costs, safety
and insurance costs and employee turnover related costs.

Selling, general and administrative expense
includes managerial costs, information systems, sales force,
administrative expenses and professional fees. We have made a
significant investment in information systems and in assembling
our management team to support our growth strategy. As such, our
selling, general and administrative expense as a percentage of
our revenue has increased over prior periods. We expect selling,
general and administrative expense to decline as a percentage of
revenue as we complete and integrate acquisitions, increase
volume at our JED Landfill and commence operations at our new
landfill sites in Arizona and Texas.

Depreciation, depletion and amortization expense
includes depreciation of fixed assets over their estimated
useful lives using the straight-line method, depletion of
landfill costs, including capping, closure and post-closure
obligations using the units-of-consumption method, and
amortization of intangible assets including customer
relationships and contracts and covenants not-to-compete which
are amortized over the expected life of the benefit to be
received by such intangibles. As further discussed in
Note 2 to the unaudited condensed consolidated financial
statements, effective January 1, 2004, we changed our
methodology we use to define obligating events under Statement
of Financial Accounting Standards (SFAS)
No. 143 Accounting for Asset Retirement
Obligations.

We capitalize certain third party costs related
to pending acquisitions or development projects. These costs
remain deferred until we cease to be engaged on a regular and
ongoing basis with completion of the proposed acquisition, at
which point they are charged currently in earnings. In the event
that the target is acquired, these costs are incorporated in the
cost of the acquired business. We currently expense indirect and
internal costs including executive salaries, overhead and travel
costs related to acquisitions.

Recent Acquisitions

In November 2003, we entered into an agreement to
acquire the assets of Allied Waste Industries, Inc.s
(Allied) northern and central Florida operations
(the Allied Assets) for a purchase price of
approximately $120.0 million subject to an adjustment for
working capital. The primary metropolitan areas currently served
by the Allied Assets are Tampa, Sarasota and Jacksonville,
Florida. On December 31, 2003, we completed the first phase
of the Allied Assets acquisition, which included the assets for
which all required transfer consents and approvals had been
obtained. The cash purchase price for the first phase of the
acquisition was approximately $81.1 million. During the
first quarter of 2004, we acquired additional Allied Assets
totaling approximately $14.3 million. We expect to complete the
acquisition of the remaining Allied Assets in the second quarter
of 2004.

In April 2004, we completed an exchange of the
Nassau Landfill and related assets with a book value of
approximately $2.2 million, which were acquired from Allied
in December 2003, for a collection operation in the metropolitan
Orlando area and cash proceeds of $10.0 million, subject to
working capital adjustments. As

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part of this exchange, the new owner of the
Nassau Landfill assumed responsibility for the closure and post
closure obligations related to the landfill. Proceeds in excess
of net assets exchanged will reduce goodwill from the original
Allied Assets acquisition.


In February 2004, we acquired a permitted
municipal solid waste landfill currently under development in
Fort Bend County, Texas (the Fort Bend Regional
Landfill). The purchase price was comprised of
$5.1 million in cash, a seller financed promissory note of
$5.0 million and the issuance of 4,375,000 Common Shares
valued at approximately $25.0 million. The landfill site,
which will serve the metropolitan Houston area, is approximately
2,600 acres and has a permitted capacity of 47.6 million
cubic yards. In addition to the landfill, we acquired a
leasehold interest in a fully permitted transfer station site
near Houston. In connection with the acquisition of the Fort
Bend Regional Landfill, we entered into a royalty agreement,
under which we will be required to pay a royalty of $0.25 per
ton of eligible waste, as defined in the agreement, after we
commence operations at the site and for the first five years
subsequent to the date of the royalty agreement and $0.35 per
ton of eligible waste thereafter. Separately, in January 2004,
we acquired an industrial-permitted waste landfill site in
Saskatchewan. The purchase price was comprised of
$1.1 million in cash and the issuance of 12,000 Common
Shares valued at approximately $0.1 million.

During the first quarter of 2004, we also
acquired the assets of three collection businesses in the
metropolitan Phoenix area for aggregate cash consideration of
approximately $8.4 million plus the current and future
issuance of 949,800 Common Shares valued at approximately
$5.5 million. One of these acquisitions contains an
earn-out provision that may require us to issue up to 40,000
Common Shares and pay additional cash purchase price to the
sellers. Under the terms of the agreement, this provision will
be settled in the second quarter of 2004, at which time, the
purchase price will be adjusted accordingly.

In April 2004, we completed the acquisition of
all of the issued and outstanding shares of Florida Recycling
Services, Inc. (Florida Recycling) for a purchase
price of $98.5 million in cash, working capital of
approximately $2.2 million, subject to further adjustment,
and the issuance of 9,250,000 Common Shares valued at
approximately $51.2 million. Florida Recyclings
operations are based in central Florida, primarily serving the
Orlando, Daytona, Fort Myers, and Tampa markets.

We expect to continue to make strategic
acquisitions which we intend to finance through cash on hand,
our new Senior Secured Credit Facilities, and/or the issuance of
other debt and equity financings.

Factors that Might Affect Future
Results

We have recently acquired three large municipal
solid waste landfill developments in the United States, one of
which began operations in January 2004, that we believe will
materially affect our revenue and profitability going forward.
These landfill developments do not have historical operations,
and accordingly, our condensed consolidated operating results
will not be comparable to financial information for future
periods.

The following summarizes our three acquired
landfills and landfill developments:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | JED Landfill  a municipal solid waste
    landfill with 24 million cubic yards of permitted capacity,
    located in Osceola County, Florida. The landfill is located
    approximately 20 miles south of metropolitan Orlando and is well
    positioned to serve the Orlando metropolitan area and the
    surrounding counties. The facility opened for operation in
    January 2004.                                                                                                                                             
|
| |  | Southeast Regional Landfill (previously referred
    to as the Cactus Waste Landfill)  a municipal solid
    waste landfill development with an expected capacity of
    224 million cubic yards that we expect to be permitted in
    the second half of 2004, located in Pinal County, Arizona. The
    landfill is located between Phoenix and Tucson, Arizona and is
    well-positioned to serve both markets. We have begun
    construction of the facility and expect to open it for operation
    in the second half of 2004.
|
| |  | Fort Bend Regional Landfill (previously referred
    to as the Long Point Landfill)  as previously
    discussed, a municipal solid waste landfill development with
    48 million cubic yards of permitted capacity, located in
    Fort Bend County, Texas. The landfill is located approximately
    15 miles southwest of metropolitan Houston and is
    well-positioned to serve the Houston metropolitan area,
    including Fort                                                                                              

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| |  |                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------
| |  | Bend County. We have begun construction of the
    facility and expect to open it for operation in the second half
    of 2004.

Recent Financing Activities

We financed the acquisition of Florida Recycling
and repaid our previously existing credit facilities with a
majority of the net proceeds from borrowings under Waste
Services new Senior Secured Credit Facilities, an offering
by Waste Services of 9 1/2% Senior Subordinated Notes and
the private placement of Common Shares of Capital. Information
relative to these financing transactions is as follows:



| |                                         
| | ----------------------------------------
| | New Senior Secured Credit
    Facilities

On April 30, 2004, Waste Services entered
into new Senior Secured Credit Facilities (the Credit
Facilities) with a syndicate of lenders. The Credit
Facilities consist of a five-year revolving credit facility in
the amount of $60.0 million, a portion of which will be
available to Capital and its Canadian subsidiaries, and a
seven-year term loan facility in the amount of
$100.0 million. The Credit Facilities bear interest based
upon a spread over base rate or Eurodollar loans, as defined, at
our option. The Credit Facilities are secured by substantially
all of Waste Services assets and the assets of its U.S.
restricted subsidiaries as well as the shares of capital stock
of the U.S. restricted subsidiaries held by Waste Services.
Prior to our Migration Transaction, the Credit Facilities will
be guaranteed by our current parent, Capital Environmental
Resource Inc., and Capitals Canadian subsidiaries and
secured by substantially all of their assets (including shares
of capital stock of Waste Services). After the completion of our
Migration Transaction, Capital and its Canadian subsidiaries
will become Waste Services foreign subsidiaries and will
no longer guarantee or pledge all of their assets except that
their guarantees and pledges will continue in support of the
portion of the revolving credit facility available to Capital
and its Canadian subsidiaries. Furthermore, 65% of the common
shares of Waste Services first tier
non-U.S. subsidiaries will be pledged to secure our
obligations under the Credit Facilities.



| |                              
| | -----------------------------
| | New Senior Subordinated Notes

On April 30, 2004, Waste Services completed
a private offering of 9 1/2% Senior Subordinated Notes
(Subordinated Notes) due 2014 for gross proceeds of
$160.0 million. The Subordinated Notes mature on
April 15, 2014. Interest on the Subordinated Notes is
payable semi annually commencing October 15, 2004. The
Subordinated Notes are redeemable, in whole or in part, at our
option, on or after April 15, 2009, at a redemption price
of 104.75% of the principal amount, declining rateably in annual
increments to par on or after April 15, 2012, together with
accrued interest to the redemption date. In addition, prior to
April 15, 2007, we may redeem up to 35.0% of the aggregate
principal amount of the Subordinated Notes with the proceeds of
certain equity offerings, at a redemption price equal to 109.5%
of the principal amount. Upon a change of control of Waste
Services, as such term is defined in the Indenture, Waste
Services is required to offer to repurchase all the Subordinated
Notes at 100.0% of the principal amount, together with accrued
interest and liquidated damages, if any, and obtain the consent
of our senior lenders to such payment or repay our indebtedness
under our Credit Facilities.

The Subordinated Notes are unsecured and are
subordinate to our existing and future senior secured
indebtedness, including our Credit Facilities structurally
subordinated to existing and future indebtedness of Waste
Services non-guarantor subsidiaries, rank equally with any
unsecured senior indebtedness and senior to our existing and
future subordinated indebtedness.

The Subordinated Notes contain certain covenants
that, in certain circumstances and subject to certain
limitations and qualifications, restrict, among other things
(i) the incurrence of additional debt; (ii) the
payment of dividends and repurchases of stock; (iii) the
issuance of preferred stock and the issuance of stock of our
subsidiaries; (iv) certain investments; (v) the
repurchase of Waste Services Preferred Stock;
(vi) transactions with affiliates and (vii) certain sales
of assets.

Our obligations with respect to the Subordinated
Notes, including principal, interest, premium, if any, and
liquidated damages, if any, are fully and unconditionally
guaranteed on an unsecured, senior subordinated basis by all of
Waste Services existing and future domestic restricted
subsidiaries. Pending completion of the

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Migration Transaction, Waste Services
obligations with respect to the Subordinated Notes will also be
guaranteed by our current parent, Capital Environmental Resource
Inc., and each of Capitals Canadian subsidiaries. After
completion of the Migration Transaction, Capital and its
Canadian subsidiaries will become Waste Services foreign
subsidiaries and will no longer guarantee the Subordinated Notes.


We also entered into a Registration Rights
Agreement with the initial purchasers of the Subordinated Notes
in which we agreed to (i) file a registration statement
with respect to the Subordinated Notes within 120 days of
the closing date of the issuance of the notes, or the issuance
date pursuant to which we will exchange the Subordinated Notes
for registered notes of Waste Services with terms identical to
the Subordinated Notes; (ii) have such registration
statement declared effective within 210 days of the
issuance date; (iii) maintain the effectiveness of such
registration statement for minimum periods specified in the
agreement and (iv) file a shelf registration statement in
the circumstances and within the time periods specified in the
agreement. If we do not comply with these obligations, we will
be required to pay liquidated damages, in cash, in an amount
equal to $0.05 per week per $1,000 in principal amount of the
unregistered Subordinated Notes, for each week that the default
continues for the first 90-days following default. Thereafter,
the amount of liquidated damages increases by an additional
$0.05 per week per $1,000 in principal amount of unregistered
Subordinated Notes for each subsequent 90-day period until all
defaults have been cured, to a maximum of $0.50 per week per
$1,000 in principal amount of unregistered Subordinated Notes
outstanding. Liquidated damages, if any, are payable at the same
time as interest payments due under the Subordinated Notes.



| |                 
| | ----------------
| | Equity Placement

On April 30, 2004, we raised approximately
$50.7 million, after deducting expenses of approximately
$2.9 million, from the sale of 13,400,000 Common Shares of
Capital and warrants to purchase 1,340,000 Common Shares of
Capital in private placement transactions to certain investors.
Sanders Morris Harris Inc. acted as the placement agent for the
issuance and was paid a placement agent fee of approximately
$2.7 million. Don A. Sanders, one of our directors, is a
principal of Sanders Morris Harris Inc. We also entered into an
agreement with the investors in the private placement in which
we agreed to file a registration statement for the 13,400,000
Common Shares and the 1,340,000 Common Shares issuable upon
exercise of the warrants and have that registration statement
declared effective within 120 days from April 30,
2004. If we do not comply with these registration requirements,
we will be required to pay liquidated damages equal to 1.0% of
the value, as defined in the agreement, of the unregistered
Common Shares for each month that the Common Shares are
unregistered. Since liquidated damages would be payable in cash,
until the Common Shares are registered, the proceeds from the
financing will be classified outside of shareholders
equity.

Results of Operations for the Three Months
Ended March 31, 2004 and 2003

A significant portion of our operations are
currently domiciled in Canada; as such, we translate the results
of operations and financial condition of our Canadian operations
into U.S. dollars. Therefore, reported results of
operations and financial condition are subject to changes in the
exchange relationship between the two currencies. For example,
as the relationship of the Canadian dollar strengthens against
the U.S. dollar, revenue is favorably affected and
conversely expenses are unfavorably affected. Assets and
liabilities of Canadian operations have been translated from
Canadian dollars into U.S. dollars at the exchange rates in
effect at the relevant balance sheet dates, and revenue and
expenses of Canadian operations have been translated from
Canadian dollars into U.S. dollars at the average exchange
rates prevailing during the period. Unrealized gains and losses
on translation of the Canadian operations into U.S. dollars
are reported as a separate component of shareholders
equity and are included in comprehensive income (loss).
Separately, monetary assets and liabilities denominated in
U.S. dollars held by the Canadian operations are
re-measured from U.S. dollars into Canadian dollars and
then translated into U.S. dollars. The effects of
re-measurement are reported currently as a component of net
income (loss). Currently, we do not hedge our exposure to
changes in foreign exchange rates.

26



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Our consolidated results of operations for the
three months ended March 31, 2004 and 2003 by geographic
segment is as follows (in thousands):

|                              |                                             |                              |        |        |   |       |        |      |   |   |        |        |  |  |        |      |  |   |        |        |   |  |        |      |  
|----------------------------- | ------------------------------------------- | ---------------------------- | ------ | ------ | - | ----- | ------ | ---- | - | - | ------ | ------ |  |  | ------ | ---- |  | - | ------ | ------ | - |  | ------ | ---- | -
|                              |                                             |                             
|                              |                                             | Three Months Ended March 31,
|                              |                                             |                             
|                              |                                             |                             
|                              |                                             | 2004                        
|                              |                                             |                             
|                              |                                             |                              |        |        |   |      
|                              |                                             | Canada                       |        | U.S.   |   | Total
|                              |                                             |                              |        |        |   |      
|                              |                                             |                              |        |        |   |       |        |      |   |   |        |       
|Revenue                       |                                             | $                            | 30,317 |        |   |       | 100.0% |      |   | $ | 20,000 |        |  |  | 100.0% |      |  | $ | 50,317 |        |   |  | 100.0% |     
|Operating expenses:           |                                             |                              |        |        |   |       |        |      |   |   |        |        |  |  |        |      |  |   |        |        |   |  |        |     
|                              | Cost of operations                          |                              |        | 20,900 |   |       |        | 68.9 |   |   |        | 13,271 |  |  |        | 66.4 |  |   |        | 34,171 |   |  |        | 67.9 |  
|                              | Selling, general and administrative expense |                              |        | 4,929  |   |       |        | 16.3 |   |   |        | 5,630  |  |  |        | 28.2 |  |   |        | 10,559 |   |  |        | 21.0 |  
|                              | Depreciation, depletion and amortization    |                              |        | 3,446  |   |       |        | 11.4 |   |   |        | 2,026  |  |  |        | 10.0 |  |   |        | 5,472  |   |  |        | 10.9 |  
|                              | Foreign exchange loss (gain) and other      |                              |        | (90    | ) |       |        | (0.3 | ) |   |        |       |  |  |        | 0.0  |  |   |        | (90    | ) |  |        | (0.2 | )
|                              |                                             |                              |        |        |   |       |        |      |   |   |        |        |  |  |        |      |  |   |        |        |   |  |        |     
|Income (loss) from operations |                                             | $                            | 1,132  |        |   |       | 3.7%   |      |   | $ | (927   | )      |  |  | (4.6   | )%   |  | $ | 205    |        |   |  | 0.4%   |     
|                              |                                             |                              |        |        |   |       |        |      |   |   |        |        |  |  |        |      |  |   |        |        |   |  |        |     

|                              |                                             |                              |        |        |   |       |        |      |   |   |   |   |  |  |    |   |  |   |        |        |   |  |        |      |  
|----------------------------- | ------------------------------------------- | ---------------------------- | ------ | ------ | - | ----- | ------ | ---- | - | - | - | - |  |  | -- | - |  | - | ------ | ------ | - |  | ------ | ---- | -
|                              |                                             |                             
|                              |                                             | Three Months Ended March 31,
|                              |                                             |                             
|                              |                                             |                             
|                              |                                             | 2003                        
|                              |                                             |                             
|                              |                                             |                              |        |        |   |      
|                              |                                             | Canada                       |        | U.S.   |   | Total
|                              |                                             |                              |        |        |   |      
|                              |                                             |                              |        |        |   |       |        |      |   |   |   |  
|Revenue                       |                                             | $                            | 25,280 |        |   |       | 100.0% |      |   | $ |  |   |  |  | % |   |  | $ | 25,280 |        |   |  | 100.0% |     
|Operating expenses:           |                                             |                              |        |        |   |       |        |      |   |   |   |   |  |  |    |   |  |   |        |        |   |  |        |     
|                              | Cost of operations                          |                              |        | 16,594 |   |       |        | 65.6 |   |   |   |  |  |  |    |  |  |   |        | 16,594 |   |  |        | 65.6 |  
|                              | Selling, general and administrative expense |                              |        | 4,432  |   |       |        | 17.5 |   |   |   |  |  |  |    |  |  |   |        | 4,432  |   |  |        | 17.5 |  
|                              | Depreciation, depletion and amortization    |                              |        | 3,225  |   |       |        | 12.8 |   |   |   |  |  |  |    |  |  |   |        | 3,225  |   |  |        | 12.8 |  
|                              | Foreign exchange loss (gain) and other      |                              |        | (35    | ) |       |        | (0.1 | ) |   |   |  |  |  |    |  |  |   |        | (35    | ) |  |        | (0.1 | )
|                              |                                             |                              |        |        |   |       |        |      |   |   |   |   |  |  |    |   |  |   |        |        |   |  |        |     
|Income (loss) from operations |                                             | $                            | 1,064  |        |   |       | 4.2%   |      |   | $ |  |   |  |  | % |   |  | $ | 1,064  |        |   |  | 4.2%   |     
|                              |                                             |                              |        |        |   |       |        |      |   |   |   |   |  |  |    |   |  |   |        |        |   |  |        |     



| |        
| | -------
| | Revenue

A summary of our revenue for the three months
ended March 31, 2004 and 2003 is as follows (in thousands):

|                             |  |                              |        |      |  |  |       |   |  |   |        |  |  |  |       |  
|---------------------------- |  | ---------------------------- | ------ | ---- |  |  | ----- | - |  | - | ------ |  |  |  | ----- | -
|                             |  |                             
|                             |  | Three Months Ended March 31,
|                             |  |                             
|                             |  |                              |        |     
|                             |  | 2004                         |        | 2003
|                             |  |                              |        |     
|                             |  |                              |        |      |  |  |       |  
|Collection                   |  | $                            | 40,160 |      |  |  | 79.8  | % |  | $ | 20,631 |  |  |  | 81.6  | %
|Landfill disposal            |  |                              | 3,406  |      |  |  | 6.8   |   |  |   | 2,129  |  |  |  | 8.4   |  
|Transfer station             |  |                              | 2,505  |      |  |  | 5.0   |   |  |   | 1,459  |  |  |  | 5.8   |  
|Material recovery facilities |  |                              | 2,320  |      |  |  | 4.6   |   |  |   | 941    |  |  |  | 3.7   |  
|Other specialized services   |  |                              | 1,926  |      |  |  | 3.8   |   |  |   | 120    |  |  |  | 0.5   |  
|                             |  |                              |        |      |  |  |       |   |  |   |        |  |  |  |       |  
|Total revenue                |  | $                            | 50,317 |      |  |  | 100.0 | % |  | $ | 25,280 |  |  |  | 100.0 | %
|                             |  |                              |        |      |  |  |       |   |  |   |        |  |  |  |       |  

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Revenue was $50.3 million and
$25.3 million for the three months ended March 31,
2004 and 2003, respectively, an increase of $25.0 million or
99.0%. The increase in revenue for the three months ended
March 31, 2004 as compared to the same period in the prior
year is due to the following (in thousands):

|                                                              |  |   |        |  |  |  |      |  
|------------------------------------------------------------- |  | - | ------ |  |  |  | ---- | -
|Acquisitions in the United States                             |  | $ | 20,000 |  |  |  | 79.1 | %
|Internal revenue growth due to price and volume
    increases |  |   | 844    |  |  |  | 3.3  |  
|Acquisitions in Canada                                        |  |   | 362    |  |  |  | 1.4  |  
|Favorable effects of foreign exchange rate
    fluctuations   |  |   | 3,831  |  |  |  | 15.2 |  
|                                                              |  |   |        |  |  |  |      |  
|Increase in revenue                                           |  | $ | 25,037 |  |  |  | 99.0 | %
|                                                              |  |   |        |  |  |  |      |  

We anticipate revenue to continue to increase in
2004 as a result of our recently completed acquisitions,
increased disposal volume at our JED Landfill in Florida, which
opened in January 2004, and the commencement of operations at
our recently acquired landfill sites in Arizona and Texas. The
favorable effects of foreign exchange fluctuations reflect the
strengthening of the Canadian dollar versus the U.S. dollar for
the first quarter of 2004 versus the same period in 2003.



| |                   
| | ------------------
| | Cost of Operations

Cost of operations was $34.2 million and
$16.6 million for the three months ended March 31,
2004 and 2003, respectively, an increase of $17.6 million
or in excess of 100%. As a percentage of revenue, cost of
operations was 67.9% and 65.6% for the three months ended
March 31, 2004 and 2003, respectively. The increase in cost
of operations as a percentage of revenue is due to higher costs
of labor on residential hauling contracts as well as a change in
mix of revenue from our landfill disposal business. The increase
in cost of operations for the three months ended March 31,
2004 as compared to the same period in the prior year is due to
the following (in thousands):

|                                                              |  |   |        |  |  |  |       |  
|------------------------------------------------------------- |  | - | ------ |  |  |  | ----- | -
|Acquisitions in the United States                             |  | $ | 13,271 |  |  |  | 80.0  | %
|Labor cost increases                                          |  |   | 1,104  |  |  |  | 6.7   |  
|Acquisitions in Canada                                        |  |   | 238    |  |  |  | 1.4   |  
|Other increases                                               |  |   | 323    |  |  |  | 1.9   |  
|Unfavorable effects of foreign exchange rate
    fluctuations |  |   | 2,641  |  |  |  | 15.9  |  
|                                                              |  |   |        |  |  |  |       |  
|Increase in cost of operations                                |  | $ | 17,577 |  |  |  | 105.9 | %
|                                                              |  |   |        |  |  |  |       |  



| |                                                
| | -----------------------------------------------
| | Selling, general and administrative
    expense

Selling, general and administrative expense was
$10.6 million and $4.4 million for the three months
ended March 31, 2004 and 2003, respectively, an increase of
$6.2 million or in excess of 100%. As a percentage of
revenue, selling, general and administrative expense was 21.0%
and 17.5% for the three months ended March 31, 2004 and
2003, respectively. The overall increase in selling, general and
administrative expense is primarily due to increased salaries,
systems and other overhead costs incurred in connection with our
expansion into the U.S. Also included in selling, general and
administrative expense is non-cash compensation expense
(benefit) related to warrants issued to an executive
officer in 2001 for which variable accounting applies.
Stock-based compensation expense (benefit), which is based
primarily on changes in our stock price, was $(1.4) million and
$(0.3) million for the three months ended March 31, 2004
and 2003, respectively. The unfavorable effects of foreign
exchange movements increased selling, general and administrative
expense 14.0%. We expect selling, general and administrative
expense as a percentage of revenue to decline in future periods
in 2004, primarily due to spreading our overhead costs over a
larger revenue base resulting from the acquisition and
integration of the remaining Allied Assets and Florida Recycling.



| |                                             
| | --------------------------------------------
| | Depreciation, depletion and
    amortization

Depreciation, depletion and amortization was
$5.5 million and $3.2 million for the three months
ended March 31, 2004 and 2003, respectively, an increase of
$2.3 million or 69.7%. As a percentage of revenue

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depreciation, depletion and amortization was
10.9% and 12.8% for the three months ended March 31, 2004
and 2003, respectively. The increase in depreciation, depletion,
and amortization is primarily due to acquisitions in our
U.S.-based operations. The decline in depreciation, depletion,
and amortization as a percentage of revenue is primarily due to
the effect of higher depletion related to special waste disposal
jobs in the first quarter of 2003. The increase in depreciation,
depletion and amortization for the three months ended
March 31, 2004 as compared to the same period in the prior
year is due to the following (in thousands):


|                                                              |  |   |       |   |  |  |       |  
|------------------------------------------------------------- |  | - | ----- | - |  |  | ----- | -
|Acquisitions in the United States                             |  | $ | 2,026 |   |  |  | 62.8  | %
|Increase in depreciation on trucks                            |  |   | 118   |   |  |  | 3.7   |  
|Other increases                                               |  |   | 163   |   |  |  | 5.0   |  
|Decrease in depletion at our Canadian operations              |  |   | (497  | ) |  |  | (15.4 | )
|Unfavorable effects of foreign exchange rate
    fluctuations |  |   | 437   |   |  |  | 13.6  |  
|                                                              |  |   |       |   |  |  |       |  
|Increase in depreciation, depletion and
    amortization      |  | $ | 2,247 |   |  |  | 69.7  | %
|                                                              |  |   |       |   |  |  |       |  

Depreciation on our trucks increased primarily
due to an increase in our fleet size. Depletion decreased
primarily due to lower volumes at our two existing Canadian
landfills. The weighted average landfill depletion rate for our
operating Canadian landfills during the three months ended
March 31, 2004 and 2003 was C$8.66 and C$10.09 per tonne,
respectively. The weighted average landfill depletion rate for
our operating U.S. landfills during the three months ended
March 31, 2004 was $5.23 per ton.



| |                                           
| | ------------------------------------------
| | Foreign exchange loss (gain) and
    other

Foreign exchange loss (gain) and other was
less than $(0.1) million for the three months ended
March 31, 2004 and 2003. The foreign exchange gain and
other is the result of re-measuring U.S. dollar denominated cash
balances into Canadian dollars.



| |                 
| | ----------------
| | Interest expense

The components of interest expense which includes
cumulative mandatorily redeemable preferred stock dividends on
amortization of issue costs for the three months ended
March 31, 2004 and 2003 are as follows:

|                                                                             |  |                              |        |      |  |  |       |   |  |   |       |  |  |  |       |  
|---------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- |  |  | ----- | - |  | - | ----- |  |  |  | ----- | -
|                                                                             |  |                             
|                                                                             |  | Three Months Ended March 31,
|                                                                             |  |                             
|                                                                             |  |                              |        |     
|                                                                             |  | 2004                         |        | 2003
|                                                                             |  |                              |        |     
|                                                                             |  |                              |        |      |  |  |       |  
|Waste Services Preferred Stock dividends and
    amortization of issue costs |  | $                            | 4,019  |      |  |  | 38.9  | % |  | $ |      |  |  |  |      | %
|Credit facility interest                                                     |  |                              | 3,900  |      |  |  | 37.7  |   |  |   | 919   |  |  |  | 69.6  |  
|Amortization of debt issue costs                                             |  |                              | 2,210  |      |  |  | 21.4  |   |  |   | 220   |  |  |  | 16.7  |  
|Other interest expense                                                       |  |                              | 206    |      |  |  | 2.0   |   |  |   | 181   |  |  |  | 13.7  |  
|                                                                             |  |                              |        |      |  |  |       |   |  |   |       |  |  |  |       |  
|                                                                             |  | $                            | 10,335 |      |  |  | 100.0 | % |  | $ | 1,320 |  |  |  | 100.0 | %
|                                                                             |  |                              |        |      |  |  |       |   |  |   |       |  |  |  |       |  

Interest expense was $10.3 million and
$1.3 million for the three months ended March 31, 2004
and 2003, respectively, an increase of $9.0 million or in excess
of 100%. A substantial portion of the increase is due to
non-cash dividends and amortization of issue costs on our
cumulative mandatorily redeemable preferred shares, which
consists of $2.6 million for accrued and unpaid dividends
and $1.4 million for amortization of discount and issue
costs. Higher outstanding borrowings and higher interest rates
on our credit facilities also increased interest expense by
$3.0 million. The weighted average interest rate on credit
facility borrowings was 9.0% and 6.1%, for the three months
ended March 31, 2004 and 2003, respectively.

We expect interest expense to increase in future
periods in 2004 due to increased debt balances outstanding as a
result of the issuance of our Credit Facilities and Subordinated
Notes in April 2004. On April 30, 2004, and concurrently
with the issuance of our Credit Facilities and Senior
Subordinated Notes, we repaid our 364-day Senior Secured Credit
Facility (the 364-day Facility). In connection with
the

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refinancing, we will be expensing the
then-remaining unamortized debt issue costs of $5.9 million
on the 364-day Facility in the second quarter of 2004.




| |                     
| | --------------------
| | Income tax provision

The provision for income taxes was $0.8 and less
than $0.1 million, representing an effective tax rate of
negative 8.2% and 16.8% for the three months ended
March 31, 2004 and 2003, respectively. The difference from
the statutory rate in 2004 is primarily due to the tax effect of
the non-deductible dividends on the cumulative mandatorily
redeemable preferred shares and the corresponding amortization
of discounts and debt issue costs and the Canadian Large
Corporations tax. Due to the lack of operating history relative
to our U.S. operations, we have provided a valuation allowance
for our net operating loss carryforwards generated in the U.S.
During the first quarter of 2004, we provided for an additional
allowance of $3.6 million related to losses incurred
relative to our U.S. operations.

Liquidity and Capital Resources

Our principal capital requirements are to fund
capital expenditures, primarily related to landfill site
development, business and asset acquisitions and debt service.
Significant sources of liquidity are cash on hand, working
capital, borrowings from our credit facilities, our ability to
issue performance bonds and letters of credit and proceeds from
debt and equity issuances.

As of March 31, 2004, our cash and cash
equivalents was $5.8 million and net working capital,
defined as current assets less restricted cash, deferred
financing costs for our refinanced 364-day Facility and current
liabilities, was $9.5 million. As of March 31, 2004,
restricted cash of $1.0 million represented funds held in
escrow to finance the acquisition of certain of the remaining
Allied Assets. As of March 31, 2004, prepaid expenses and
other current assets included $9.0 million of cash
collateral deposits for letters of credit.

During the second quarter of 2004, we financed
the acquisition of Florida Recycling and repaid our 364-day
Facility with the majority of the net proceeds from borrowings
under our Credit Facilities, the offering of Subordinated Notes
and the private placement of Common Shares of Capital. The
details of these debt and equity offerings are more fully
described in Recent Financing Activities.

Our Credit Facilities contain certain financial
and other covenants that restrict our ability to, among other
things, make capital expenditures, incur indebtedness, incur
liens, dispose of property, repay debt, pay dividends,
repurchase shares and make certain acquisitions. Our financial
covenants include: (i) minimum consolidated interest
coverage, (ii) maximum total leverage and
(iii) maximum senior secured leverage. The covenants and
restrictions limit the manner in which we conduct our operations
and could adversely affect our ability to raise additional
capital. Any failure by us to comply with these covenants and
restrictions will, unless waived by the lenders, result in an
inability to borrow under the Credit Facilities or an immediate
obligation to repay all amounts outstanding. In such event, we
would be required to refinance our debt or obtain capital from
other sources, including the issuance of additional debt or
equity or sales of assets, in order to meet our repayment
obligations, which may not be possible.

The following table sets forth our financial
covenant levels for each of the next four quarters:

|               |  |                      |           |                             |  |                         |           |  |  |  |           | 
|-------------- |  | -------------------- | --------- | --------------------------- |  | ----------------------- | --------- |  |  |  | --------- | 
|               |  | Maximum Consolidated |           | Maximum Consolidated Senior |  | Minimum Consolidated   
|Fiscal Quarter |  | Leverage Ratio       |           | Secured Leverage Ratio      |  | Interest Coverage Ratio
|               |  |                      |           |                             |  |                        
|FQ2 2004       |  |                      | 5.50:1.00 |                             |  |                         | 2.50:1.00 |  |  |  | 2.50:1.00 | 
|FQ3 2004       |  |                      | 5.50:1.00 |                             |  |                         | 2.50:1.00 |  |  |  | 2.50:1.00 | 
|FQ4 2004       |  |                      | 5.25:1.00 |                             |  |                         | 2.25:1.00 |  |  |  | 2.75:1.00 | 
|FQ1 2005       |  |                      | 5.11:1.00 |                             |  |                         | 2.25:1.00 |  |  |  | 2.75:1.00 | 



| |                                                                              
| | -----------------------------------------------------------------------------
| | 364-day Senior Secured Credit Facility
    (repaid in full on April 30, 2004)

In December 2003, Waste Services entered into the
$220.0 million 346-day Facility comprised of a
$195.0 million term loan and a $25.0 million revolving
credit facility, which was secured by substantially all of

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our current and future acquired assets. Initial
borrowings under the 364-day Facility were used to finance the
acquisition of certain of the Allied Assets and to repay our
prior senior credit facility in full. The 364-day Facility bore
interest at 9.0% per annum and was repaid with the proceeds of
the Credit Facilities, Subordinated Notes and equity placement
previously discussed. As of March 31, 2004, we had
$172.1 million outstanding under the term loan and
$12.0 million drawn on the revolving credit facility.




| |                                                       
| | ------------------------------------------------------
| | Cumulative Mandatorily Redeemable Preferred
    Shares

In May 2003, Waste Services issued 55,000 shares
of redeemable Preferred Stock (the Waste Services
Preferred Stock) to Kelso Investment Associates VI, L.P.
and KEP VI, LLC (collectively Kelso), pursuant to
the terms of an agreement dated as of May 6, 2003, as
amended in February 2004, (the Waste Services Subscription
Agreement), at a price of $1,000 per share. Waste Services
also issued to Kelso 7,150,000 warrants to purchase shares of
Common Stock (on a one-for-one basis) of Waste Services for
$3.00 per share. The warrants are exercisable at any time
following the completion of the Migration Transaction. The
issuance of the Waste Services Preferred Stock resulted in
proceeds of approximately $49.5 million, net of fees of
approximately $5.5 million. The shares of Waste Services
Preferred stock are non-voting. The Waste Services Preferred
Stock entitles the holders to a liquidation preference of $1,000
per share and a cumulative cash dividend of 17.75% per annum
(compounding and accruing quarterly in arrears). The liquidation
preference approximated $64.4 million as of March 31, 2004.
As we are not permitted to declare and pay cash dividends
pursuant to the terms of our Credit Facilities, the dividend
payments will accrue. The Waste Services Preferred Stock,
including all accrued and unpaid dividends, must be redeemed in
full by no later than May 6, 2015. Until May 6, 2006,
we may redeem all or any part of the Waste Services Preferred
Stock on payment of the sum of $1,000 per share plus accrued and
unpaid dividends calculated as if the Waste Services Preferred
Stock were redeemed on May 6, 2006, or approximately
$92.7 million. If we do not exercise our option to redeem
all of the Waste Services Preferred Stock by May 6, 2009,
Kelso may require Capital to initiate a sale of Waste Services
or of its assets on terms acceptable to our board consistent
with the exercise of their fiduciary duties. Pursuant to an
amendment to the Certificate of Designations of Waste Services
dated April 30, 2004, if Waste Services determines, after
conducting a sale process, that any such sale would not yield
sufficient proceeds to repay in full the indebtedness then
outstanding under our Credit Facilities and the redemption
amount of our Subordinated Notes issued on April 30, 2004,
or at least $320 million, then Waste Services may elect to
delay such sale. The sale date may be delayed until the earliest
to occur of (i) the final maturity date of the Subordinated
Notes (April 15, 2014); (ii) the date on which our
Credit Facilities and the Subordinated Notes are fully repaid or
otherwise satisfied or (iii) a sale of Waste Services. We
refer to this date as the delayed sale date. If we do not
initiate and complete a sale of Waste Services or its assets
within 20 months of initiation of the sale process by the
holders of Waste Services Preferred Stock, then on notice from
the holders of the Waste Services Preferred Stock, all
outstanding Waste Services Preferred Stock will become due and
payable on the first anniversary of the date on which the
holders of Waste Services Preferred Stock gave notice requiring
the initiation of a sale process, for a liquidation amount of
1.20 times the liquidation preference of $1,000 per share. If
the sale day has been delayed, then Waste Services is not
required to pay this increased liquidation amount until the
delayed sale date.

Also pursuant to the Amended Certificate of
Designations, if Waste Services becomes subject to a liquidation
or insolvency event (as such terms are defined in our Amended
and Restated Credit Agreement dated April 30, 2004) or in
the event of a change of control of Waste Services (as such term
is defined in the Amended Certificate of Designations), all
payments and other distributions to holders of Waste Services
Preferred Stock will be subordinate to the repayment in full of
our Credit Facilities. This provision does not prohibit any
accrual or increase in the dividend rate or in the liquidation
preference of the Waste Services Preferred Stock as provided for
in the Amended Certificate of Designations, or the distribution
of additional shares or other equity securities to the holders
of Waste Services Preferred Stock, so long as such additional
shares or other equity securities are subject to at least
equivalent subordination provisions. In addition, the Amended
Certificate of Designations prohibits us from making any payment
or distribution to the holders of Waste Services Preferred Stock
in the event of a sale of Waste Services or its assets, or the
exercise by the holders of Waste Services Preferred Stock of
their right to require payment of the liquidation amount of
their shares as a result of the failure to consummate a sale of
Waste Services as described in the preceding

31



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##### Table of Contents



paragraph, unless such payment or distribution is
expressly permitted pursuant to the terms of the agreement then
governing our Credit Facilities.


Under the terms of the Waste Services
Subscription Agreement, as amended, if we do not complete the
Migration Transaction by June 30, 2004, the dividend
payable on the Waste Services Preferred Stock issued to Kelso
will increase by 1% per annum, from 17.75%, for every month that
the Migration Transaction is delayed, up to a maximum increase
of an additional 12.0% per annum. We may also be required to
issue to Kelso an additional 250,000 warrants per month for each
month that the Migration Transaction is delayed after
June 30, 2004, up to an additional 6,000,000 warrants to
purchase Waste Services common stock, at an exercise price of
$0.01 per share. The increase in the dividend payable on the
Waste Services Preferred Stock issued to Kelso would increase
the amount to be paid to Kelso on the redemption of the Waste
Services Preferred Stock and would have a material adverse
effect on our financial condition. By the terms of the
agreement, as amended, if the Migration Transaction is not
completed at all, Kelso may also require us to exchange the
existing 7,150,000 warrants to purchase common stock of Waste
Services, and any of the additional warrants for common stock of
Waste Services issued as a result of our completing the
Migration Transaction after June 30, 2004, for warrants to
purchase Capitals Common Shares.



| |                
| | ---------------
| | Equity Issuance

The following table summarizes our Common Share
issuances during the three months ended March 31, 2004:

|                                                                      |                                      |               |           |           | 
|--------------------------------------------------------------------- | ------------------------------------ | ------------- | --------- | --------- | 
|                                                                      |                                      | Number of    
|                                                                      |                                      | Common Shares
|                                                                      |                                      |              
|Acquisitions:                                                         |                                      |               |           |          
|                                                                      | Fort Bend Regional Landfill          |               |           | 4,375,000 | 
|                                                                      | Collection operations in Arizona     |               |           | 911,370   | 
|                                                                      | Landfill acquisition in Saskatchewan |               |           | 12,000    | 
|                                                                      |                                      |               |           |          
|Total Common Shares issued in connection with
    acquisitions        |                                      |               | 5,298,370 |          
|Common Shares issued upon exercise of options and
    warrants        |                                      |               | 70,704    |          
|                                                                      |                                      |               |           |          
|Common Shares issued during the three months
    ended March 31, 2004 |                                      |               | 5,369,074 |          
|                                                                      |                                      |               |           |          

On April 30, 2004, we issued 13,400,000
Common Shares of Capital and warrants to purchase 1,340,000
Common Shares of Capital in private placement transactions to
certain investors. On April 30, 2004, we also issued
8,250,000 Common Shares in connection with the acquisition of
Florida Recycling.



| |                                                  
| | -------------------------------------------------
| | Surety Bonds, Letters of Credit and
    Insurance

Municipal solid waste services contracts, permits
and licenses to operate transfer stations, landfills and
recycling facilities may require performance or surety bonds,
letters of credit or other means of financial assurance to
secure contractual performance. As of March, 31, 2004 and
December 31, 2003, we had provided customers and various
regulatory authorities with such bonds and letters of credit
amounting to approximately $20.0 million and
$19.6 million, respectively, to collateralize our
obligations.

Our U.S.-based automobile, general liability and
workers compensation insurance coverage is subject to
certain deductible limits. Claims in excess of such deductible
levels are fully insured subject to our policy limits. However,
we have a limited claims history for our U.S. operations
and it is reasonably possible that recorded reserves may not be
adequate to cover future payment of claims. Adjustments, if any,
to our reserves will be reflected in the period in which the
adjustments are known. As of March 31, 2004 we have posted
a letter of credit with our U.S. insurer of approximately
$2.3 million to cover the liability for losses within the
deductible limit. Separately, we have deposited
$0.3 million with our third-party claims administrator to
settle claims as incurred. We are required to replenish the
escrow fund to its current level as it is depleted.

32



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##### Table of Contents





| |           
| | ----------
| | Cash Flows

The following discussion relates to the major
components of the changes in cash flows for the three months
ended March 31, 2004 and 2003.



| |                                         
| | ----------------------------------------
| | Cash Flows from Operating
    Activities

Cash flows provided by (used in) operating
activities was $(0.2) million and $3.8 million for the
three months ended March 31, 2004 and 2003, respectively.
The decrease in cash provided by operating activities is
primarily due to increased overhead spending as well as changes
in working capital during the first quarter of 2004.



| |                                            
| | -------------------------------------------
| | Cash Flows used in Investing
    Activities

Cash flows used in investing activities was
$40.5 million and $18.4 million for the three months
ended March 31, 2004 and 2003, respectively. The increase
in cash used in investing activities is primarily due to the
various business acquisitions we completed during the first
quarter of 2004 and increased capital expenditures. We expect to
incur increasing capital expenditures as we continue development
of our recently acquired landfill sites. We intend to finance
capital expenditures and business acquisitions through operating
cash flow, borrowings under our Credit Facilities, subject to
the limitations on our investing activities set out in the
Credit Facilities Agreement, and the issuance of additional debt
and/or equity securities. We expect capital expenditures for the
full year of 2004 to be approximately $50.0 million.



| |                                         
| | ----------------------------------------
| | Cash Flows from Financing
    Activities

Cash flows provided by financing activities was
$25.6 million and $29.2 million for the three months
ended March 31, 2004 and 2003, respectively. The decrease
in cash flows from financing activities is due to the issuance
of our Series 1 Preferred Shares during the first quarter
of 2003, offset by our use of restricted cash in the
acquisitions of certain of the Allied Assets and increased
borrowings on our 364-day Facility.



| |                            
| | ---------------------------
| | Off-Balance Sheet Financing

We have no off-balance sheet debt or similar
obligations, other than our letters of credit and performance
and surety bonds discussed previously, which are not debt. We
have no transactions or obligations with related parties that
are not disclosed, consolidated into or reflected in our
reported results of operations or financial position. We do not
guarantee any third party debt. We have entered into a put or
pay disposal agreement with RCI Environment Inc., Centres de
Transbordement et de Valorisation Nord Sud Inc., RCM
Environnement Inc. (collectively the RCI Companies)
and Intersan Inc. pursuant to which we have posted a letter of
credit for C$4.0 million to secure our obligations and
those of the RCI Companies to Intersan Inc. Concurrently with
the put or pay disposal agreement with the RCI Companies, we
entered into a three year agreement with Canadian Waste Services
Inc. to allow us to deliver non-hazardous solid waste to their
landfill in Michigan. Details of these agreement are further
described in our annual financial statements for the year ended
December 31, 2003, as filed on Form 20-F with the
Securities and Exchange Commission.

33



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##### Table of Contents



Landfill sites

The following table summarizes the changes in our
operating landfill capacity for the three months ended
March 31, 2004 (in thousands of cubic yards):

|                 |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |        | 
|---------------- | --------------------------- | --------- |  | --------- |  | -------- |  | -------- |  |  |  | ---- | - |  |  | ------ | 
|                 |                             | Balance,  |  |           |  |          |  | Balance,
|                 |                             | Beginning |  | Landfills |  | Airspace |  | End of  
|                 |                             | of Period |  | Acquired  |  | Consumed |  | Period  
|                 |                             |           |  |           |  |          |  |         
|Canada           |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|                 | Permitted capacity          |           |  | 10,871    |  |          |  | 1,430    |  |  |  | (123 | ) |  |  | 12,178 | 
|                 | Probable expansion capacity |           |  |          |  |          |  |         |  |  |  |     |   |  |  |        | 
|                 |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|                 | Total available airspace    |           |  | 10,871    |  |          |  | 1,430    |  |  |  | (123 | ) |  |  | 12,178 | 
|                 |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|                 | Number of sites             |           |  | 2         |  |          |  | 1        |  |  |  |      |   |  |  | 3      | 
|                 |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|United States(1) |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|                 | Permitted capacity          |           |  | 26,084    |  |          |  |         |  |  |  | (112 | ) |  |  | 25,972 | 
|                 | Probable expansion capacity |           |  | 18,300    |  |          |  |         |  |  |  |     |   |  |  | 18,300 | 
|                 |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|                 | Total available airspace    |           |  | 44,384    |  |          |  |         |  |  |  | (112 | ) |  |  | 44,272 | 
|                 |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|                 | Number of sites             |           |  | 3         |  |          |  |         |  |  |  |      |   |  |  | 3      | 
|                 |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|Total            |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|                 | Permitted capacity          |           |  | 36,955    |  |          |  | 1,430    |  |  |  | (235 | ) |  |  | 38,150 | 
|                 | Probable expansion capacity |           |  | 18,300    |  |          |  |         |  |  |  |     |   |  |  | 18,300 | 
|                 |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|                 | Total available airspace    |           |  | 55,255    |  |          |  | 1,430    |  |  |  | (235 | ) |  |  | 56,450 | 
|                 |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       
|                 | Number of sites             |           |  | 5         |  |          |  | 1        |  |  |  |      |   |  |  | 6      | 
|                 |                             |           |  |           |  |          |  |          |  |  |  |      |   |  |  |       



---



|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes our Southeast Regional Landfill in
    Arizona (previously referred to as Cactus Waste) and Fort Bend
    Regional Landfill, which are currently under construction and
    are expected to have initial permitted capacities of 224 million
    and 48 million cubic yards, respectively.

Trend Information



| |            
| | -----------
| | Seasonality

We expect the results of our Canadian operations
to vary seasonally, with revenue typically lowest in the first
quarter of the year, higher in the second and third quarters,
and lower in the fourth quarter than in the third quarter. The
seasonality is attributable to a number of factors. First, less
solid waste is generated during the late fall, winter and early
spring because of decreased construction and demolition
activity. Second, certain operating costs are higher in the
winter months because winter weather conditions slow waste
collection activities, resulting in higher labor costs, and rain
and snow increase the weight of collected waste, resulting in
higher disposal costs, which are calculated on a per ton basis.
Also, during the summer months, there are more tourists and
part-time residents in some of our service areas, resulting in
more residential and commercial collection. Consequently, we
expect operating income to be generally lower during the winter.
We believe that the effect of seasonality on our results of
operations from our U.S. operations, which are located in warmer
climates than our Canadian operations, will be less significant
than that of our Canadian operations.

Disclosure Regarding Forward-Looking
Statements

This Form 10-Q contains certain
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, or the
Exchange Act. Some of these forward-looking statements include
forward-looking phrases such as anticipates,
believes, could, estimates,
expects, foresees, intends,
may, should or will
continue, or similar expressions or the negatives thereof
or other

34



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##### Table of Contents



variations on these expressions, or similar
terminology, or discussions of strategy, plans or intentions.
These statements also include descriptions in connection with,
among other things:




| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our anticipated revenues, capital expenditures,
    future cash flows and financing requirements, and those of
    companies or assets we acquire;
|
| |  | the implementation of our business strategy;                                                                                                      
|
| |  | completion of our migration transaction and any
    acquisition transactions;                                                                     
|
| |  | descriptions of the expected effects of our
    competitive strategies; and                                                                       
|
| |  | the impact of actions taken by our competitors
    and other third parties, including courts and other governmental
    authorities.              

Such statements reflect our current views
regarding future events and are subject to certain risks,
uncertainties and assumptions. Many factors could cause the
actual results, performance or achievements to be materially
different from any future results, performance or achievements
that forward-looking statements may express or imply, including,
among others:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in inflation;                                                                                                                                                                                       
|
| |  | changes in regulations affecting our business and
    costs of compliance;                                                                                                                                  
|
| |  | revocation of existing permits and licenses or
    the refusal to renew or grant new permits and licenses, which
    are required to enable us to operate our business or implement
    our growth strategy;
|
| |  | our ability to successfully implement our
    corporate strategy, including our migration transaction and
    integrate any acquisitions we undertake;                                                      
|
| |  | the outcome of pending legal claims against us;                                                                                                                                                             
|
| |  | changes in general business and economic
    conditions and in the financial markets; and                                                                                                                   
|
| |  | changes in accounting standards or pronouncements.                                                                                                                                                          

Some of these factors are discussed in more
detail in our annual report on Form 20-F, as filed with the
Securities and Exchange Commission for the year ended
December 31, 2003, including under Item 3. of the
annual report, Key Information  Risk Factors.
If one or more of these risks or uncertainties affects future
events and circumstances, or if underlying assumptions do not
materialize, actual results may vary materially from those
described in this Form 10-Q and our annual report as
anticipated, believed, estimated or expected, and this could
have a material adverse effect on our business, financial
condition and the results of our operations. Further, any
forward-looking statement speaks only as of the date on which it
is made, and except as required by law we undertake no
obligation to update any forward-looking statement to reflect
events or circumstances after the date on which it is made or to
reflect the occurrence of anticipated or unanticipated events or
circumstances.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    about Market Risk

A significant portion of our operations are
currently domiciled in Canada; as such, we translate the results
of our operations and financial condition of our Canadian
operations into U.S. dollars. Therefore, our reported results of
operations and financial condition are subject to changes in the
exchange relationship between the two currencies. For example,
as the relationship of the Canadian dollar strengthens against
the U.S. dollar our revenue is favorably affected and conversely
our expenses are unfavorably affected. Assets and liabilities of
Canadian operations have been translated from Canadian dollars
into U.S. dollars at the exchange rates in effect at the
relevant balance sheet date, and revenue and expenses of
Canadian operations have been translated from Canadian dollars
into U.S. dollars at the average exchange rates prevailing
during the period. Unrealized gains and losses on translation of
the Canadian operations into U.S. dollars are reported as a
separate component of shareholders equity and are included
in comprehensive income (loss). Separately, monetary assets and
liabilities denominated in U.S. dollars held by the Canadian
operation are re-measured

35



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##### Table of Contents



from U.S. dollars into Canadian dollars and then
translated into U.S. dollars. The effects of re-measurement are
reported currently as a component of net income (loss).
Currently, we do not hedge our exposure to changes in foreign
exchange rates. For the three months ended March 31, 2004
and 2003 we estimate that a 5.0% increase or decrease in the
relationship of the Canadian dollar to the U.S. dollar would
increase or decrease loss from Canadian operations by less than
$0.1 million.


As of March 31, 2004 we were not materially
exposed to variable interest rates, however, under our new
Credit Facilities the interest rates payable on our revolving
and term facilities are based on a spread over base rate and
Eurodollar loans as defined at our option.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Disclosure Controls and Procedures/
    Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this
report, we carried out an evaluation under the supervision and
with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934, or the Exchange Act. Based upon
this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were adequate and effective and designed to ensure that material
information relating to us (including our consolidated
subsidiaries) required to be disclosed by us in the reports we
file under the Exchange Act is recorded, processed, summarized
and reported within the required time periods.



| |                             
| | ----------------------------
| | Changes in Internal Controls

During the period covered by this filing, there
have been no changes in our internal control over financial
reporting that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




PART II. OTHER INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

Information regarding our legal proceedings may
be found under the Legal Proceedings section of
Note 10, Commitments and Contingencies to our
unaudited interim condensed consolidated financial statements
filed herein.






|        |                                                                                     
|------- | ------------------------------------------------------------------------------------
|Item 2. | Changes in Securities, Use of Proceeds and
    Issuer Purchases of Equity Securities

In January 2004, we issued a total of 324,070
Common Shares to one individual in partial consideration for the
acquisition of a solid waste services company in Phoenix,
Arizona, a private placement transaction pursuant to
Rule 506 of Regulation D under the Securities Act.
Also in January 2004, we issued 12,000 Common Shares to one
individual as partial consideration for an acquisition. The
exemption from registration was pursuant to Section 4(2) of
the Securities Act and the rules and regulations promulgated
under the Securities Act on the basis that the transaction did
not involve a public offering.

In February 2004, we issued a total of 4,375,000
Common Shares to 31 entities and individuals as partial
consideration for the acquisition of the Fort Bend Regional
Landfill and transfer station permit in a private placement
transaction pursuant to Rule 506 of Regulation D under
the Securities Act.

In March 2004, we issued 587,300 Common Shares to
on individual as partial consideration for the acquisition of a
solid waste services company in Phoenix, Arizona, in a private
placement transaction pursuant to Rule 506 of
Regulation D under the Securities Act.

36



---



##### Table of Contents








|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults upon Senior
    Securities

None.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

None.






|        |                  
|------- | -----------------
|Item 5. | Other Information

None.






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits 



| |                |                                                                                                                                                 
| | -------------- | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit 10.1  | Employment Agreement dated as of January 5,
    2004, between Capital Environmental Resource Inc., Waste
    Services, Inc. and Ivan R. Cairns  
| | Exhibit 10.2  | Employment Agreement dated as of
    February 23, 2004, between Capital Environmental Resource
    Inc., Waste Services, Inc. and Mark A. Pytosh
| | Exhibit 18.1  | Letter regarding change in accounting principle
    executed by BDO Dunwoody LLP on May 12, 2004.                                               
| | Exhibit 31.1  | Section 302 Certification of David
    Sutherland  Yoest, Chairman and Chief Executive
    Officer                                             
| | Exhibit 31.2  | Section 302 Certification of Ronald L.
    Rubin, Executive Vice President and Chief Financial Officer                                          
| | Exhibit 32.1  | Section 1350 Certification of David
    Sutherland  Yoest, Chairman and Chief Executive
    Officer                                            
| | Exhibit 32.2  | Section 1350 Certification of Ronald L.
    Rubin, Executive Vice President and Chief Financial Officer                                         

(b)Reports on Form 8-K and 6-K
during the quarter ended March 31, 2004:

Form 8-K

None.

Form 6-K

On January 5, 2004, we filed a current
report on Form 6-K to announce the completion of the first
phase of the previously announced acquisition of the Northern
and Central Florida operations of Allied Waste Industries, Inc.
and the acquisition of the assets of Horizon Waste Systems of
Arizona, Inc.

On February 26, 2004 we filed a current
report on Form 6-K to announce the acquisition of a new
landfill development in Fort Bend County, Texas, that upon
completion of the Migration Transaction, Jack E. Short, Wallace
L. Timmeny and Michael J. Verrochi would join the board of
directors of Waste Services, Inc. and become the boards
audit committee and to file Amendment No. 1 dated as of
February 13, 2004, to the Preferred Subscription Agreement
dated as of May 6, 2003, among Waste Services, Inc.,
Capital Environmental Resource Inc., Kelso Investment
Associates VI, L.P. and KEP VI LLC.

On March 22, 2004, we filed a current report
on Form 6-K to file our financial statements for the
quarter ended September 30, 2003.

37



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, Capital Environmental Resource Inc. (the
Company) has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date: May 17, 2004



| |     |                           
| | --- | --------------------------
| | By: | /s/ DAVID SUTHERLAND-YOEST

| |                                          
| | -----------------------------------------
| |                                          
| | David Sutherland-Yoest                   
| | Chairman of the Board,                   
| | Chief Executive Officer, and
    Director



| |     |                    
| | --- | -------------------
| | By: | /s/ RONALD L. RUBIN

| |                             
| | ----------------------------
| |                             
| | Ronald L. Rubin             
| | Executive Vice President and
| | Chief Financial Officer     

38



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##### Table of Contents



EXHIBIT INDEX

|            |              |  |  |             |  |                                                                                                                                                 
|----------- | ------------ |  |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |              |  |  | Description
|            |              |  |  |            
|            | Exhibit 10.1 |  |  |            |  | Employment Agreement dated as of January 5,
    2004, between Capital Environmental Resource Inc., Waste
    Services, Inc. and Ivan R. Cairns  
|            | Exhibit 10.2 |  |  |            |  | Employment Agreement dated as of
    February 23, 2004, between Capital Environmental Resource
    Inc., Waste Services, Inc. and Mark A. Pytosh
|            | Exhibit 18.1 |  |  |            |  | Letter regarding change in accounting principle
    executed by BDO Dunwoody LLP on May 12, 2004                                                
|            | Exhibit 31.1 |  |  |            |  | Section 302 Certification of David
    Sutherland  Yoest, Chairman and Chief Executive
    Officer                                             
|            | Exhibit 31.2 |  |  |            |  | Section 302 Certification of Ronald L.
    Rubin, Executive Vice President and Chief Financial Officer                                          
|            | Exhibit 32.1 |  |  |            |  | Section 1350 Certification of David
    Sutherland  Yoest, Chairman and Chief Executive
    Officer                                            
|            | Exhibit 32.2 |  |  |            |  | Section 1350 Certification of Ronald L.
    Rubin, Executive Vice President and Chief Financial Officer